Personal computer sales are looking better -- but that won't be much help to contract manufacturers unless someone puts a stop to the bloody PC price war.

In particular, warns Deutsche Bank analyst Chris Whitmore, the scramble by Dell ( DELL) to gain market share by selling boxes for even less, and the stabilization of component prices are likely to increase pricing pressure on Sanmina-SCI ( SANM) and smaller vendors, despite Hewlett Packard's ( HPQ) recent hint that it would raise prices.

Throwing a bit of cold water on last week's mini rally by the electronic manufacturing sector (EMS) -- shares of contract manufacturers increased by an average of 13% -- Whitmore said the fundamentals don't justify the valuations: "At 55 times CY04 EPS we believe EMS shares are already discounting a major snapback in 2H-03 and 2004 earnings and leave little room to err," he said in a note to clients Monday.

Similarly, Jim Savage of Wells Fargo Securities called PC pricing "irrational" last week in a note downgrading Sanmina-SCI to hold from buy on valuation concerns.

The worries over continued price-cutting come as the PC market shows some signs of regaining at least a bit of its lost vigor. Sales in the second-calendar quarter were stronger than expected, prompting market researchers Gartner and IDC to lift PC sales forecasts slightly for the rest of the year. And Intel ( INTC) recently boosted guidance for its third quarter after finding that sales of microprocessors, chipsets and motherboards also were up.

Savage also noted that despite positive comments from Flextronics' ( FLEX) management during the company's midquarter update on Aug. 18, there has been no meaningful, broad-based improvement in the telecom-equipment market.

More positively, Savage said he believes Sanmina-SCI will be a significant beneficiary of a tech-sector recovery, and forecast "significant earnings recovery" in fiscal 2004. He expects the company to improve its margins gradually over the next 18 months to 24 months. Wells does not have an investment banking relationship with Sanmina-SCI.

Also on the upside, H-P's "Big Bang" product launch is already sparking an uptick in production at Flextronics and to a lesser extent at Jabil Circuit ( JBL), said Deutsche Bank's Whitmore, who noted that H-P began filling the channel with new products in July. Deutsche Bank has an investment banking relationship with Sanmina and Jabil, but not Flextronics.