Updated from 4:25 p.m. EST
The fourth quarter was a little kinder to
than most people had expected. But notwithstanding the stock trading opportunities that could attend further upside surprises in the sector, it'll take more than a solid Christmas to put the personal computer industry back on track.
Compaq said Monday that it will post a profit for the fourth quarter rather than a loss, and estimated that revenues would exceed $8 billion, up from previous forecasts of $7.6 billion to $7.8 billion. Analysts were expecting the company to lose 3 cents a share for the quarter, according to Thomson Financial.
The news sent Compaq's shares up 29 cents, or 2.5%, to $11.68, and contributed to a small gain in
, in part because of investors' expectations that it, too, might have had a better-than-expected Christmas.
, which had also gained on the Compaq news, after the bell reaffirmed guidance for a fourth-quarter profit before taxes, but said revenues would be less than expected because of an 15% reduction in unit volume. The company expects revenues of $1.16 billion. Gateway will still hit its profit outlook because of a higher average selling price of about $1,660 per unit.
Salomon Smith Barney PC analyst Richard Gardner wrote in a report that he expects upside surprises on from others in the sector this quarter. In a down market, Dell gained 3 cents, or 0.1%, to $29.62, while Gateway rose 43 cents, or 4.4%, to $10.25.
, whose shares move in part on expectations about its merger with Compaq, shed 14 cents, to $23.02.
During Thanksgiving week, PC sales rose 101% from the previous week, compared with 40% to 60% increases in the previous two years, according to Gardner. And sales remained strong through Christmas despite few promotions. In fact, U.S. retail PC sales grew 30% in the fourth quarter from the third quarter; usually they rise only 15% to 20%, he wrote.
Nevertheless, fourth-quarter sales look good because they are being compared with a horrible third quarter, and because companies aggressively lowered their end-of-year forecasts after Sept. 11. It might not be until the middle of 2002 that year-over-year comparisons turn positive, and even that will depend on corporate demand, which remains anemic.
"Having a weak September made the fourth-quarter uptick look stronger than many people thought it would be," said James Ragan, a PC analyst at Crowell Weedon. "It's still too early to call a turnaround in the sector. We need to see stronger replacement orders from the enterprise sector, and we haven't seen that yet."
Despite the longer-term uncertainty, and shortly before Compaq made its announcement Monday morning, Lehman Brothers analyst Dan Niles raised his rating on Compaq to strong buy from buy. Last Friday, SoundView Technology also upgraded Compaq to buy from hold. Niles noted that uncertainty surrounding Compaq's merger with Hewlett-Packard didn't hurt corporate demand in the fourth quarter as much as had been expected. Compaq has been battling increasing skepticism that it will complete its merger with Hewlett, but some analysts speculated that its announcement this morning would help push that deal through. Stronger profits put a dent in arguments that Hewlett has offered to pay too much for the company.
Elsewhere in the sector, Robertson Stephens analyst Eric Rothdeutsch upgraded Dell to buy from market perform, because of strong fourth-quarter demand in the consumer, European and Asian markets. Rothdeutsch also raised his price target on Dell to $35 from $26, lifted his 2003 estimates to 73 cents a share from 67 cents, and said he expects the company to achieve solid market-share gains in 2003.
Of all the PC makers, Dell is probably most likely to issue an upside preannouncement. With its direct sales approach, the company gets inventory off of its shelves more quickly than its rivals do, and with component prices falling around 1% per week over the past four quarters, it has been able to under-price its competitors while still making a profit. Niles estimated that Dell has at least a 5% margin advantage over Compaq. Its quarter doesn't end until January, however, so a preannouncement, if one were to come, is probably a few weeks off.
"The company wants to be conservative right now," says Ragan, referring to Dell. "They might say something like Compaq did today, but it's not something to count on. The first evidence we'll get is when Intel reports a week from Tuesday. They'll give us a handle on how their quarter went, and we can extrapolate that to the PC sector."
While the tone was positive among the computer makers, this wasn't the only segment of the electronics universe boosting technology investors' spirits Monday.
Circuit City Stores
said before the bell that fourth-quarter earnings for the
Circuit City Group
, its chain of electronics stores, will come in at 72 cents to 76 cents a share, including the company's retained interest in
, a used car dealer. According to First Call, analysts expect the company to earn 71 cents a share in the quarter. Circuit City gained $2.29, or 8.3%, at $29.75.
"In December we built on the in-store momentum generated over the last few months," Circuit City said in a press release. "We are pleased that our customer service, marketing and merchandising initiatives implemented earlier this year continue to gain traction." Circuit City was up 9.3% to $30, while CarMax tacked on 1% at $20.75.