Wild Swings in Outlook Limit Impact of PC Analysts

Dan Niles, Ashok Kumar and Don Young all vie for the position of industry ax.
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Early last year,

TSC

crowned

BancBoston Robertson Stephens

analyst Dan Niles as the PC ax for his

downgrade of

Compaq

(CPQ)

, well ahead of news about the company's channel-stuffing problems.

A lot has happened since then, which makes selecting a new PC ax a tough task. The sub-$500 PC is a real price point; computer companies are scrambling into the server, storage and services businesses in an attempt to offset profit declines; and Compaq's earnings blew up.

Unfortunately for Niles, he didn't foresee Compaq's latest mishaps. "We missed out on Compaq this time," says Niles matter-of-factly. "We were anticipating a bad quarter and not a preannouncement." Niles sheepishly lowered his strong buy rating on Compaq to a buy on the Monday after Compaq's Friday afternoon

preannouncement. (His firm has done no Compaq underwriting.)

The one analyst who did anticipate Compaq's horrendous quarter was Ashok Kumar, the PC and chip analyst at

U.S. Bancorp Piper Jaffray

. Kumar revised his first-quarter earnings estimate for Compaq to 20 cents a share, an audacious move that put him at odds with the consensus of 35 cents. But when Compaq announced earnings of 16 cents a share last week, it was Kumar who looked like a hero. (His firm has done no Compaq underwriting.)

But to crown Kumar the hardware ax for this one earnings revision may seem premature. After all, he

maintained his buy rating on Compaq well after he revised his earnings estimate March 18. Kumar says he still likes Compaq because the stock is trading so cheaply right now and Compaq is still an enterprise-class company. He is holding off on altering his earnings estimates for the rest of the year until Compaq Chairman Ben Rosen provides a blueprint for the company's future.

Other analysts who have also gone negative on Compaq's prospects for some time include

PaineWebber's

Don Young and

Merrill Lynch's

Steven Milunovich, who rated the company neutral last October when most analysts were pounding the table on the leading PC maker. "Compaq is clearly losing share to Dell and now IBM," said Milunovich in a note to clients, in which he lowered his 1999 earnings estimate on the company from $1.20 to $1.03 Thursday. His firm has done no recent Compaq underwriting.

But Milunovich missed one heck of a run-up through January, although in the end he looks to have been right on Compaq. "Merrill's analysts have been under the gun ever since

Thomas Kurlak and

Lucianne Painter left," says one institutional money manager, who requested anonymity.

Longtime semiconductor analyst Kurlak left Merrill to join the hedge fund

Tiger Management

, while Painter moved to Merrill's private-client group. "Milunovich may be a bit extended right now." Milunovich didn't return calls seeking comment.

Compaq's Rise and Fall
Stock price of Compaq over six months

Source: BigCharts

Young presciently lowered his Compaq rating to neutral from buy Feb. 26, when the stock was trading at 38, according to his associate Hank Hagey. Compaq's stock closed Friday at 23, or 39% lower. "I have to admit Young is one of the few analysts who really understand the way our industry works," says an IBM executive, who requested anonymity. Young is rather bearish on the PC industry and sees low demand globally as a big drawback.

But it is the head-to-head battle of Kumar vs. Niles that seems to be heating up. Niles

foresaw

Dell's

(DELL) - Get Report

second-quarter revenue shortfall back in mid-February and received plenty of attention for his call. However, Kumar had seen it

coming a quarter before that. Now Kumar has become a Dell fan once again, saying last week the magic is back in Austin

Dell's Texas hometown, thanks to renewed PC unit growth momentum. It appears that Compaq's loss of direction will be Dell's gain.

Niles -- dubbed Darth Vader by some analysts for his morbid industry outlook -- is gloomier and argues that PCs will soon be so cheap as to be given away, much like how cheap cellular phones are dangled in front of customers as a way to sign them up to long-term contracts. In this scenario, PCs will be given to customers who sign up for a year or more of Internet access. "This may be great for Internet companies, but not so hot for PC makers," says Niles. He predicts PC stocks to be "very choppy" until August or September.

"The summer is going to be really difficult because the corporate market is moving into the sub-$1,000 space as well," Niles says. Two tech research firms,

International Data

and

Dataquest

said Monday that PC growth was

stronger than expected in the first quarter. The black cloud hanging over the second half of the year, however, makes it difficult to predict what is going to happen next.

In the end, the reason why there are no dominant voices or axes on the PC space was summed up best by Paul Mansky, who works with Kumar at Piper Jaffray. "It's going to be a weird year, so you can throw all traditional demand patterns out the window. I don't think it's going to be Armageddon, but it will be a guessing game for analysts in the second half."

Which analyst do you think is worthy of being designated the PC industry's ax?

Merrill Lynch's Steven Milunovich

U.S. Bancorp Piper Jaffray's Ashok Kumar

PaineWebber's Don Young

BancBoston Roberston Stephens' Dan Niles

Credit Suisse First Boston's Michael Kwatinetz