Hardware's Hopes Are Now Pinned on Dell

Drama mounts ahead of the PC giant's earnings Thursday afternoon.
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Updated from 7:05 a.m. EDT

Reeling from

Hewlett-Packard's

(HPQ) - Get Report

ugly execution issues, Wall Street looks to

Dell

(DELL) - Get Report

Thursday afternoon for assurance that computer hardware isn't falling into the hole already occupied by the rest of the tech world.

And although

Dell

(DELL) - Get Report

already broke the news in July that it would see

better-than-expected earnings, don't rule out an upside surprise on revenue when the PC giant reports financial results after the bell.

The Round Rock, Texas-based computer maker, which has a habit of besting expectations, should benefit from PC-share gains in the second calendar quarter at the expense of H-P. Moreover, Dell's assertion in July that it is had seen "robust" sales of enterprise systems

makes far more sense Thursday morning. Gains in foreign markets as well as strength in the U.S. small and medium business segment should also contribute to a solid performance.

On the bottom line, Dell should get a boost from stabilizing PC prices and favorable costs on computer memory and liquid crystal display monitors.

Wall Street analysts' estimates assume Dell will match its own upwardly revised guidance for a per-share profit of 31 cents, revised up on July 16 from its previous guidance of 29 cents. When the company hiked EPS guidance, it said 1 cent came from better operating profitability and 1 cent from a lower tax rate.

Yet even if Dell manages to pull off a positive surprise, the stock price likely would see limited benefit. With investors stricken over signs of a tech slowdown, the market has grown reluctant to award the usual back-pats for solid performance. (Indeed, shareowners

sold stock after the company's last quarterly report in May because, while Dell delivered better-than-expected revenue, it didn't also beat earnings expectations).

And Dell shares already claim a big premium among tech stocks, reflecting the company's ability to outperform peers by taking share in the PC and server markets. Based on Wednesday's close of $33.57, Dell is up 1% this year, compared with an 11% loss for the

Nasdaq Composite

index, which closed Wednesday at 1782.

Dell also has held up better than rivals in a tech bear market that's grown bleaker over the past few months. Since mid-April, Dell shares have given up 5% of their value, compared with an 11% loss for the Nasdaq.

Of course, investors unsettled by semiconductor inventory buildups and a disappointing demand outlook on Tuesday from

Cisco

(CSCO) - Get Report

also will home in on Dell's commentary on corporate spending.

But the company isn't an ideal proxy for the broader tech market, because ongoing share gains allow it to grow faster than its peers. In the second calendar quarter alone, Dell boasted PC shipment growth of 29% over prior year levels -- far above the industry average of 10% growth, according to IDC. Dell held the top spot in the global PC market in the second quarter with an 18.3% share while claiming the strongest year-on-year growth of top vendors, at 22% (tied with

Toshiba

).

Dell execs, prone to sounding justifiably smug, are likely to counsel investors to expect more of the same on the share-gain front. But it shouldn't come as a shock if Dell managers opt for the safe route and hedge their broader industry comments with words of caution.

Analysts are gearing for Dell to guide for October quarter EPS of 33 cents with sales growth of 7% from the prior quarter, to about $12.5 billion in revenue. That's about in line with 2003 and 2001, when Dell notched 8% growth rates for the October quarter (Dell saw a sequential decline in 2002 and over 10% growth in 2000, noted A.G. Edwards).

"We think there have been signs that the PC markets remain strong and that pricing is stabilizing," said A.G. Edwards analyst David Wong in a recent note. "For these reasons we think that there is some potential upside to our estimate, but we think that in the first instance, Dell will probably not state expectations that are much higher than $12.5 or $12.6 billion." (His firm doesn't have a banking relationship with Dell).

First Albany's Joel Wagonfeld likewise said he's expecting in-line guidance, consistent with Dell's normal seasonal patterns. (His firm hasn't done banking for Dell).