UBS cut both

Dell

(DELL) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

to neutral from buy Wednesday, arguing that each faces growth constraints in a slowing market for personal computers.

The brokerage said Dell, which reports earnings Thursday, has benefited from falling component costs this year but faces challenges in 2005 simply by virtue of its size. It left its third-quarter earnings estimate of 33 cents a share and revenue estimate of $12.5 billion intact. The price target is $43.

Specifically, UBS cited the revenue contribution of Dell's 80%-owned Dell Financial Services division, arguing that after four quarters of consolidation the "buffer" of this division's sales will no longer augment year-over-year comparisons. It estimated the top-line contribution at $280 million in the third and fourth quarters.

"Taking out the benefit from DFS for the last four quarters, it is arguable that Dell's revenue grew organically by about 300 basis points less than reported, and that does not include any currency benefit that Dell does not disclose," UBS wrote.

"We believe that this DFS phenomenon, along with likely at least some currency benefit, shows that Dell has been growing at closer to 15% over the last year. As a result, we believe that this example and a slowing PC market back our view that acceleration from this level may be difficult to achieve in fiscal 2006," the brokerage said.

Dell was recently down 33 cents, or 0.9%, to $37.10 on Instinet.

UBS also sees Hewlett-Packard meeting or exceeding its fourth-quarter earnings estimate of 35 cents a share and revenue estimate of $21.05 billion. The main concerns, after a recent 20% run-up in the stock, are that expectations are high in the market and that pricing pressures could materialize.

"We believe that Dell is getting ready to exert more pricing pressure in PCs and servers by leveraging component price declines," the brokerage wrote. It left its H-P price target at $23, a number that incorporates an $18-a-share valuation estimate on the company's printer business.

Hewlett-Packard was recently down 21 cents, or 1.1%, to $19.49 on Instinet.