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Analyst reports: Wall Street puts Gateway out to pasture

At least a dozen analysts downgrade the company as the stock hits a 52-week low Thursday, one day after the computer maker slashed forecasts for the current quarter.

At least a dozen analysts downgraded Gateway as the stock hit a 52-week low Thursday, one day after the computer maker slashed its earnings and revenue forecast for the current quarter.

Weak computer sales over the Thanksgiving holiday weekend--traditionally a time of booming personal computer sales--prompted Gateway to lower its projections. Gateway chief financial officer John Todd told analysts in a conference call that sales over the four-day holiday weekend were about 30 percent lower than the same period in 1999.

Shares of San Diego, Calif.-based Gateway, which issued the warning Wednesday evening, hit a new 52-week low on Thursday. The stock bottomed out at $17.49 before a tepid rebound to $17.73 in midday trading. That's down 40 percent from the stock's closing price Wednesday and down 75 percent since the beginning of the year.

The PC maker said it expects to report operating income of 37 cents a share for the fourth quarter--25 cents below previous analyst expectations--because of "considerably weaker-than-expected consumer holiday sales of personal computers," the company said in a statement. Revenue is expected to hit $2.55 billion, roughly equal with the fourth quarter of 1999 but $500 million below expectations.

Gateway also said it will take a one-time charge of approximately $200 million, or 39 cents a share, related to losses associated with investments in technology companies. Including the charge, Gateway could report a loss of 2 cents for the fourth quarter, the company said. Gateway also lowered its earnings-per-share estimate for 2001 to $1.89, down from $2.28.

Executives were gloomy when painting a picture of the PC market in 2001. Excess inventory will likely spark price wars in the first quarter, they said, while the economic slowdown will affect the entire year.

Gateway's warning comes amid a massive freeze in the consumer PC market, which is expected to be smaller than the total PC market in 1999.

Meanwhile, analysts also downgraded or slashed the 12-month target prices of numerous computer manufacturers Thursday. Shares of Nvidia, which gets 5 percent of its business from Gateway, are down 20.73 percent from their closing price on Wednesday. The stock traded at $38.25 on Thursday morning, $10 less than on Wednesday.

Although many analysts said they anticipated Gateway's shortfall, numerous Wall Street researchers said they were shocked by the magnitude of the shortfall. In a research report titled "The Grinch Who Stole Christmas 2000 PC Sales," Chase Hambrecht & Quist analysts Walter Winnitzki and Tracy Akresh said the current holiday spending season will likely be a "bust" relative to overall PC sales.

"We would like to point to a number of factors that are responsible for the industrywide slowdown, including: economic and consumer confidence issues (these are still big-ticket discretionary purchases), the vacuum in the market from the $400 ISP rebates of last year, and the lack of any significant price/performance catalyst for consumers," the analysts wrote in a research report issued Thursday morning. "We now believe that these trends will continue into at least the spring of 2001 and could precipitate some increased pricing actions to move finished goods items and could cause some further push back in the component supply chain."

Based on similar concerns, analyst Daniel T. Niles at Lehman Brothers maintained his "outperform" rating but slashed Gateway's 12-month target price by 64.7 percent, from $85 to $30 per share.

Chase Hambrecht & Quist and Credit Suisse First Boston cut Gateway to "buy." Salomon Smith Barney and Sands Brothers downgraded it to "neutral." Merrill Lynch downgraded it from near-term "buy" to near-term "accumulate."

JP Morgan cut Gateway to "market perform," while Gerard Klauer cut it to "outperform." Wit SoundView downgraded it to "hold." Prudential Securities downgraded Gateway from "strong buy" to "accumulate."

Merrill Lynch analysts Steven Fortuna and Michael Hillmeyer said Gateway executives were correct in downgrading their forecasts based on macroeconomic trends that will likely dent sales of all PC manufacturers in the upcoming year. But they also chastised Gateway in particular for its sluggish sales over the traditional kickoff to the holiday spending spree.

"In the fourth quarter a year ago, Gateway managed to grow 13 percent sequentially even in the face of massive component shortages," the duo wrote in a research report issued Thursday. "We still believe that seasonality exists, albeit perhaps to a lesser extent than in the past. Moreover, if Gateway has been experiencing less seasonality, we would have expected to see better growth in the previous two quarters."