Gateway Finds a Groove

Shares near a two-month high as one analyst sees momentum building at the beleaguered computer maker.
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shares notched another day of gains Tuesday as investors were urged to take another look at the stock by one investment analyst.

Shares were recently up 21 cents, or 6.4%, to $3.48.

Les Santiago of Piper Jaffray kept his outperform rating on the stock, repeated his $6.50 price target, and kept his financial estimates steady as he highlighted the company's "improving professional segment and strong notebook retail climate."

Santiago cited product introductions and significant contract wins as evidence that momentum at Gateway is building. He also said he felt more comfortable that the company can hit financial targets for the just completed second quarter.

"We would be buying Gateway shares at current depressed levels as we enter the seasonally stronger second half and amid improving professional segment performance," Santiago said in a Tuesday morning research note. His firm seeks investment banking business with the companies it covers.

The professional and educational segments offer higher margins for Gateway, but the company stumbled in this segment due to a lack of new products. Santiago said that is now behind the company, noting that Gateway will further be helped by a traditionally stronger second half of the year.

The beleaguered company doesn't report financial results until July 28, but the stock has been building momentum during the past 45 days since hitting a two-year low of $2.85 in mid-May. During this period, shares have twice made a run toward $3.60, but have been rebuffed each time.

That ceiling could flip into a floor if investors gain confidence in the Irvine, Calif.-based company.

And Gateway has been helping its own cause, making several significant announcements recently.

Last week, it announced it was the only major PC vendor selected by the state of California as a technology provider under a multiyear agreement. Gateway will provide notebooks, desktops and displays, which Santiago estimated at $80 million to $100 million in revenue over the coming three to four years. Also, in mid-May, Gateway won a five-year, $45 million contract to provide computers and related services to the University of Arizona.

It's now been a little over a year since Gateway and eMachines joined forces. In the wake of the eMachines crew taking hold of the company -- led by CEO Wayne Inouye, who is CEO of the combined company -- costs were cut, retail stores were shuttered and the company refocused itself back on PCs.

From there, business and government sales have become important drivers of sales and operating margins. The company has posted three straight quarters of operating profits, and GAAP profitability shouldn't be far away. The company also will name a new CFO sometime in the coming months.

Investors have carried the stocks of other PC makers higher in anticipation of a second-half boost, but Gateway has not received that benefit. While most technology-related stocks were busy running higher in May, Gateway shares ended the month flat.

While the year so far has disappointed Gateway shareholders, who have seen the stock fall 43%, it isn't over yet. Gateway should get almost 60% of its annual sales in the coming six months. With continued momentum, the company might be able to shrug off its stigma as an underperformer.