Intel Beat Estimates? Expect PC Makers to Rally

The last few times Intel blew out its quarter, PC giants have seen big upside in the next couple weeks.
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If the past is any guide,

Intel's

(INTC) - Get Report

positive earnings surprise will light a fire under PC stocks in the coming weeks. Call it the Intel effect.

Intel Thursday reported operating net income of $2.41 billion, or 69 cents a share, which was 6 six cents above consensus estimates. The last time Intel reported a significant positive surprise -- a year ago, when it reported a 5-cent surprise for the fourth quarter of fiscal 1998 -- PC investors jumped into Intel-reliant PC stocks like they were B2B plays. In the three weeks to Feb. 1, 1999,

Gateway

(GTW)

rose 45%,

Dell

(DELL) - Get Report

shot up 37% and

Hewlett-Packard

(HWP)

jumped 15%. Even

Compaq

(CPQ)

, which didn't exactly have a banner year in 1999, saw its shares rise 8% during the period.

For PC stocks, which have been sagging of late, Intel's strength couldn't have come at a better time. PC makers generally underperformed the highflying tech market in 1999 due to Y2K issues and, more recently, a perception that margins were getting

squeezed due to component price increases.

Good Vibrations

"It's the first good revenue and EPS quarter for Intel in a year," says

Robertson Stephens

PC and chip analyst Dan Niles, who upgraded Intel to a buy from long-term attractive Monday. The end of the Y2K slowdown and the launch of Windows 2000 "will lead to a PC recovery," adds Niles, who also has buy ratings on Gateway and Compaq, and long-term attractives on Dell and Hewlett-Packard. His firm has done no underwriting for Intel or the PC group.

Thanks to a shakeout in the retail marketplace --

IBM

(IBM) - Get Report

,

Acer

and

Packard Bell NEC

all exited the U.S. retail business late last year -- average PC prices have crept up and in December may have hit a high of $844, according to the latest estimate from

PC Data

. That's up from a low of $790 in September, says Stephen Baker, director of research at the PC retail tracker.

Even so, nothing seems to put a charge into PC stocks like a good Intel earnings report. For instance, after Intel's April 13, 1998, 5-cent upside surprise for its first quarter of fiscal 1998, PC investors were quick to act. Gateway and Compaq both rose 25% over the next three weeks, and Dell jumped 18%.

Don't Worry Baby

To be sure, there may still be some cause for concern in the PC sector, because Gateway preannounced

last week, saying Intel failed to provide it with enough Pentium III and Celeron chips. The supply shortfall has now become a question mark for Dell as well, which won't report earnings for its fourth quarter (ending this month) until mid-February. Gateway also said this week that it would also use

Advanced Micro Devices

(AMD) - Get Report

chips as well as just Intel's silicon.

But Intel management may have put some of these issues to rest when it said during its conference call that inventories wouldn't remain at the all-time low levels it hit in its fourth quarter ended Dec. 25. Lower seasonal demand will allow Intel to replenish its inventory, and Intel also said it expected PC demand to continue to be healthy in the first quarter.

Analysts also say Intel's role in the launch of Windows 2000 will be a big boost for PC stocks when the

Microsoft

(MSFT) - Get Report

product is launched on Feb. 17. "Chip shortages are not always good for Dell, but the launch of Windows 2000 will more than offset any question marks investors may have about Q4," says Venu Reddy, a PC analyst at the money-management firm

Waddell & Reed

, which is long Intel and Dell. "A good Intel quarter is not only good for PC sentiment, but it sets a really positive tone for the PC stocks."