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2HRS2GO: Don&#039t fear for PC industry

COMMENTARY -- PC investors shouldn't necessarily worry just because one of the largest providers of manufacturing services for the industry sees a soft September quarter.

Today's warning from SCI Systems (NYSE: SCI) may have sent a few jitters through the PC sector. Shares of SCI's largest PC customers -- Compaq (NYSE: CPQ), Hewlett-Packard (NYSE: HWP) and Dell (Nasdaq: DELL) -- dipped today following SCI's conference call. Not all of the weakness is SCI-related; for instance, this morning's biggest loser among that trio, HP, has been pestered all week by doubt over the possible acquisition of Pricewaterhousecoopers.

Still, SCI's caution, lumped on top of a similar signals on Monday from Solectron (NYSE: SLR), clearly has PC shareholders in a down mood. Downgrades of the two top suppliers of PC processors, Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD), didn't help matters.

I'm as pessimistic as the next person, but I wouldn't expect bad things yet. PC signals are mixed.

After all, market research firm International Data Corp. recently predicted strong growth in the PC industry for the second half of this year. Analysts such as PaineWebber's Don Young agree.

A closer look at the events rattling PC shareholders in the first place also reveals a picture that isn't so bad.

Yes, SCI warned of September softness. On the other hand, the contract manufacturer also reported strong bookings for the quarter and a solid backlog, so there's plenty in the pipeline for the rest of the year.

Intel's downgrade wasn't fueled by demand but supply, meaning it's Intel's own problem, not the PC industry's. And Banc of America analyst Richard Whittington is arguably behind in lowering his rating; Intel's problems with turning out high-end Pentium III chips are not news at this point.

BofA and Prudential Securities also lowered ratings on AMD, but those moves are largely motivated by negative views of the low-end PC market, particularly among second-tier manufacturers and the so-called "white box" vendors who build generic PCs. Well-known brands, on the other hand, are likely to continue the trend of the last several years, which translates into ongoing market share gains at the expense of the smaller players.

Thus, the widely-held, publicly-traded, uberOEMs -- that is, the companies most PC investors care about -- should report good sales for the next two quarters, which is about as much visibility as you can hope for these days.

Granted, there are other concerns, such as prices and availability for components, mainly memory chips. But the top OEMs, the Compaqs, Gateways, Dells, HPs and IBMs, reportedly have been stockpiling DRAMs for months; in some cases, they also have long-term contracts locked in with DRAM suppliers. And if there's a shortage, who do you think will get DRAMs first? Dell or the box builder down the street? Don't bet on the latter.

All of this hullabaloo doesn't factor in potential boosts, such as new chips from AMD, the upcoming Pentium 4 launch, and the Windows Me operating system. If Intel gets its production problems in order and if Rambus RDRAM prices get to a reasonable level -- big ifs, granted, but the possibility is there -- the PC industry could benefit even further.

So don't turn your back on the PC sector yet.

Other issues:

  • Oracle
  • (Nasdaq: ORCL). Instead of paying CEO Larry Ellison a salary, the board of directors voted to give him one of the largest option grants in history. Wall Street likes the idea of rewarding Ellison with 20 million options over the next four years -- shares of Oracle were up 1.3125 in early afternoon trading.

    That doesn't mean it's a good idea.

    Oracle's stock price has multiplied several times over the last two years as Ellison took a larger role in affairs, but isn't that why Ellison was being paid in the first place? He was already averaging $2.7 million in salary and bonus a year, and he had 13.6 million shares slated to come, so it's not like Ellison was making minimum wage.

    And keep in mind that these options were handed out in June 1999, at a strike price of $13.75, according to Oracle's proxy statement filed this week with the U.S. Securities and Exchange Commission. Assuming that Ellison's "stock appreciation rights" vest at the standard rate of 25 percent a year, he's already realized a pre-tax paper gain of more than $340.3 million on 5 million options.

    The deal looks even greedier when you apply the Black-Scholes standard used to value options. If assume 10 percent annual appreciation for Oracle -- mediocre performance for any stock, let alone a technology issue -- Ellison's latest options cache is worth $438.3 million. Would you pay that much for a 10 percent yearly return?

    You can drag out numerous examples of massive CEO pay, but that justify egregious packages for Ellison or anyone else. Besides, most of those CEOs don't own 24 percent of the company the way Ellison does; his stake in Oracle already confers the benefit of a rising stock price.

    Proponents of huge option grants call them retention plans, but is Ellison likely to leave anytime soon? Oracle is his creation, his pride, his baby; that's already plenty of incentive to stay, options or no options. 22GO>