Holy Hardware! Merrill Analyst Has Legions of Fans

Steve Milunovich is shaping up to be Merrill's technology leader.
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Maybe

Compaq

(CPQ)

should have gone with a

Neal Hefti

tune instead of picking a

Sting

song to launch its new strategy. Reflecting on what's shaping up to be Compaq's

annus horribilis

Merrill Lynch's

(MER)

hardware analyst, Steven Milunovich, was quick to put out a report titled "King of Pain" on Aug. 10. "Although we haven't heard the song, we think it's safe to say this is terrible advertising," he said. Compaq stock fell nearly a point that day to 22 on higher-than-average volume.

POW! These are fighting words at a time when most Wall Street analysts shy away from even appearing mildly critical. In his pink oxford shirts, Milunovich stands apart from the crowd in power suits. His daily routine seems normal -- he's up at 5:15 a.m. and puts in 12-hour days at Merrill, often getting back to his New Canaan, Conn., home after his son and two daughters are put to bed.

All too normal for Wall Street. And yet, maybe there is a dark secret hidden by Milunovich's calm and methodical demeanor. His office, facing the Hudson River, on the 21st floor of Merrill's modern lair near Wall Street is sparkling clean. Not one stray piece of paper sullies his mahogany desk, which is hard to believe considering the massive volumes of reports he sends to the 14,000 or so brokers at Merrill.

"I'm a bit anal," he shrugs.

KABOOM! But that's not all. Milunovich is a big fan of

Batman

. When questioned about a set of Batman prints by

Dick Sprang

in his office, he seemed mortally wounded that this reporter didn't know all about the original Batman illustrator. (The aforementioned Hefti was the composer of the Batman TV show music.) Batman figurines from the good old days when

Adam West

was the protector of Gotham also figure prominently in the office. "I used to watch Batman when it wasn't considered campy," says Milunovich.

'I respect the guy even though he had a neutral on us forever,' -- Duane Zitzner, CEO of Hewlett-Packard's computer group.

Milunovich's reports are a must-read for investors who want to keep track of the earth-shifting changes in the hardware industry. "He's very thorough and honorable and one of the very best technology analysts out there," says Paul Schupf, who runs his own money management firm out of Hamilton, N.Y. Even though Schupf is not a Merrill client, he says, "If you can't speak to the companies, his company reports are a must-read -- and I read everyone."

Like Batman, Milunovich keeps himself lean and mean thanks to the Dr. Atkins diet (no carbs), though he admits to wolfing down eggs and bacon every morning.

It's not his nutritional makeup, however, that has computer executives paying attention to his premarket-opening reports. "I think he is looked at as the senior guy on computer-related stocks," says Duane Zitzner, CEO of

Hewlett-Packard's

(HWP)

computer group. "I respect the guy even though he had a neutral on us forever."

That was H-P's rating until recently. Milunovich, who has led Merrill's tech group for the past two years, bumped his H-P rating from neutral to accumulate as soon, he says, as he heard about the company's E-services business plan in January. The services plan was to position H-P as a company, much like

IBM

(IBM) - Get Report

and

Sun

(SUNW) - Get Report

, associated with the Internet's netherworld. "Good advertising will usually reflect strategy, and from what H-P told me back then, it seemed like a good direction to take," enthuses the 38-year-old Milunovich, whose firm has had no recent underwriting relationship with H-P. Since then, H-P stock has nearly doubled.

Last week, after H-P beat analysts' expectations by a nickel, Milunovich put the brakes on. In a report, he said H-P stock was a bit ahead of itself; the stock fell 6 points that day, in part due to Milunovich's cautious comments. The modest Milunovich isn't one to gloat about his record, but it's worth noting that

Institutional Investor

has selected him as the top server and hardware analyst for 10 years in a row.

Over a lunch of mostly fruit and colas, the career sell-sider says he seeks the big picture trends early on. Starting at

Credit Suisse First Boston

in 1983, he moved to

Salomon Brothers

in 1990. It was there, he says, where he first learned about how important "positioning" was to a company's future. "Even as far back as when IBM competed with Univac in the 1950s, the best product doesn't often win out," says Milunovich, who points out that Univac had the superior mainframe product but not the sales force to compete with IBM. "Owning a word in a customer's mind cannot be emphasized enough. For example, when you think

Dell

(DELL) - Get Report

, you think direct. IBM, global solutions.

EMC

(EMC)

, enterprise storage."

Among Merrill's technology group, semiconductor analyst Tom Kurlak often received most of the attention thanks to his against-the-grain calls on

Intel

(INTC) - Get Report

. "He always got heat," Milunovich says. Kurlak "was the highest impact analyst I've ever seen." Kurlak

left Merrill to join the hedge fund

Tiger Management

in February.

Now the spotlight is on Milunovich. Bob Kim, a former supervisor and analyst at Merrill, says Milunovich is seen as a leader of the technology team. "He has brought them together and put out a lot of reports to keep brokers and clients updated," says Kim, who now monitors Merrill analysts on a Web site called

Restex.com

. In fact, Merrill is now the third-biggest underwriter of technology equity and equity-linked underwritings, behind only

Morgan Stanley

(MWD)

and

Goldman Sachs

(GS) - Get Report

, according to

Securities Data

tables. In 1997, Merrill didn't even crack the top 10.

The tough part now is to stay at the top. Sounds like a job for the caped crusader.