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A bearish note on enterprise hardware stocks has the group under pressure at midday.

After the closing bell Monday, Merrill Lynch assumed coverage of enterprise hardware stocks








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Sun Microsystems

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, with intermediate-term neutral ratings on each of them, except for H-P, to which it gave a buy. Long-term, Merrill allotted buys to all of the stocks, except for Sun Microsystems.

In a lukewarm research report, Merrill's tech strategist, Steve Milunovich, suggested the group's woes weren't over, saying "current demand for enterprise hardware still appears weak."

The sector's troubles have been well documented. Following Y2K and the Internet boom, users had a huge excess of server capacity. As a result, most businesses didn't invest much in equipment in 2001. "Even storage sales fell 15% last year," Milunovich said in his note. But he added: "The Internet build-out should eventually resume, and we hope to get more positive later in the year."

In the meantime, Milunovich indicates the group could see further erosion in gross margins. "Enterprise hardware is one of the most cyclical and mature segments of technology," he said. "The sector's growth and margins are in gradual decline as hardware becomes commoditized."

Nevertheless, Milunovich touted EMC for "pursuing another wave of growth with storage management software." In 2002, he said, "consolidation will be an important theme, with H-P planning to merge with



and NCR and Unisys potential acquisition or breakup candidates." He noted that "IBM has reasserted its leadership," but he said, "Sun Microsystems faces significant challenges.

Lately, EMC was down 4.2% to $16.38, H-P was off 2.5% to $21.51, IBM was lower 2.8% to $105.19, NCR was behind 1.6% to $41.37, Sun was losing 3.2% to $10.77, and Unisys was falling 1.3% to $12.41.