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Gateway shares dip on disappointing profits

The PC maker's stock drops as much as 16 percent after the company releases grim fourth-quarter results, causing mixed analyst reactions.

Gateway shares dropped as much as 16 percent Friday after the company released grim fourth-quarter earnings.

After the market's close Thursday, the PC maker said it fell short of already reduced estimates for the quarter and said it would cut its work force by more than 10 percent to reduce costs.

On Friday, Gateway's shares dropped to $19.25 before recovering slightly. The shares closed down $1.80, or 8 percent, at $21.10.

Analysts greeted the Gateway's situation with mixed views.

On the positive side, analyst Gillian Munson at Morgan Stanley Dean Witter maintained an "outperform" rating on the stock but cut 2001 earnings estimates and dropped the stock's price target to $27.

Munson took a bright view of the warning, noting that it marked one step in the path to getting a lot of the bad news out of PC stocks.

"We think that once one more set of revisions gets digested by investors that the PC stocks can start to become trading vehicles," she wrote.

At Prudential Securities, analyst Kimberly Alexy maintained an "accumulate" rating on the stock along with a price target of $29. Alexy cut earnings-per-share estimates for fiscal 2001.

In a research note, Alexy said she believes that the valuation of the stock is relatively washed out. However, the analyst noted that business still looks grim over the next one to two quarters.

"We would remain cautious on the shares near-term until visibility improves on PC demand and additional growth drivers such as accelerated consumer spending, home networking and Internet appliances during the latter half of the year," she added.

At Bear Stearns, the outlook was more conservative. Analyst Andrew Neff kept a "neutral" rating on Gateway, along with the entire PC sector, while further lowering earnings and revenue targets for 2001.

The analyst maintained that the deterioration in the sector will continue to in the first half of 2001 and will be worse than anticipated, compounded by intense competition and aggressive pricing.

"Despite a compelling valuation, we question as to whether investors want to own a company that has changed from being in a growth/expansion mode to a competitive/retrenchment mode. Moreover, we do not see any signs that this is the final installment of (earnings-per-share) reductions, given the focus by leading players on market share" as opposed to profits, Neff wrote.