PC Slump May Be Dell's Speed Bump - TheStreet

Even

Dell

(DELL) - Get Report

can't manufacture growth out of thin air. Leading up to its earnings report Thursday, there's buzz the PC powerhouse may have to tone down Wall Street expectations for the April quarter. It could also temper the outlook on its new fiscal year, ending in January 2004.

As it stands, most analysts believe the company won't have a problem meeting consensus expectations for revenues of $9.73 billion and earnings of 23 cents a share for the January period, its fourth quarter of the 2002 fiscal year.

And those figures are certainly nothing to sneeze at. They imply revenue gains of 20% and profit growth of 35% from year-ago levels -- a performance most of Dell's rivals can only envy.

When

H-P

(HPQ) - Get Report

reports on its January quarter later this month, analysts will be looking for profit gains only half as big as Dell's. And H-P scored those profits through cost-cutting rather than through sales growth. In the wake of its merger, H-P is expected to see revenues shrink by about 6% over the prior year's levels.

Despite Dell's relative strength, though, the going may get tougher in the spring, typically a season when PC makers see sequential revenue declines. Last year, the company managed to hold sales and earnings flat for the April quarter, but heightened competition may render that impossible this time around. "Some of Dell's competitors are executing a little better, like

IBM

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and H-P, so the low-hanging fruit may not be as easy as last year," says First Albany analyst Walter Winnitzki, whose firm has no banking relations with Dell.

He and some other analysts think the Thomson Financial/First Call consensus estimate for the first quarter, which assumes EPS remains at 23 cents, may need to be ratcheted down. Likewise, Dell may guide for a seasonal revenue decline greater than that reflected in the current expectation for a sequential slide of 3%, to $9.45 billion.

"We believe though Dell did make Q4 estimates, weak U.S. demand, pricing pressure and the geopolitical risks will mute their expectations for Q1," predicted Lehman's Dan Niles in a recent note. "As for Q1, a fall-off in Europe and U.S. consumer demand may make expectations of revenues down 3% a challenge, given pricing is still aggressive."

Lehman hasn't recently done any banking for Dell.

There's no doubt the PC outlook is getting grimmer, with pundits lately speculating that '03 will mark the third year in a row in which revenues from computer sales actually shrink. This week, Merrill Lynch forecast the PC market will suffer a revenue decline of 1% from '02 levels; First Albany projects a similar drop-off, on the order of 1.5%. Dell, never one to stand still, has recently said it plans to reach more customers by opening trial ministores in

Sears

department stores.

But it's no surprise the market has lately cooled to the company, which draws around 80% of revenues from desktop and laptop computers. After climbing as high as $28.65 on Jan. 7, the stock has since lost 20% of its value, based on Tuesday's close of $22.94. Depending on Dell's guidance, investors may pressure the stock further.

Not only are the first-quarter estimates too optimistic, according to some, but the outlook for the fiscal year ending next January may be on the high side. The consensus estimate assumes Dell can generate sales growth of 15% from a base of some $35 billion -- probably too sunny a view, believes Winnitzki, given that surveys conducted by First Albany suggest IT spending will drop around 3% this year.

That's not to say Dell can't still outperform, he points out. "Dell was able to show nice growth in revenues in '02 when the overall PC industry was down almost 4% to 5%. That shows they can offset some of this with market share gains. The question is how successfully they will continue that in the future." Winnitzki, who has a neutral rating on the stock, says he'll reassess his take after the earnings call.

Meanwhile, on the market share front, preliminary estimates show Dell gave up its No. 1 spot in PC unit shipments to H-P in the fourth quarter, according to IDC. But the shift didn't come as a surprise. H-P, which draws a relatively bigger portion of its PC sales from consumers, was expected to see a holiday-season lift.

Dell still can claim the momentum in share gains: It posted year on year unit growth of 24%, while the combined H-P-Compaq entity saw unit sales decline 9.8%.