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Wall Street sours on PC sector

Analysts say the normally lucrative back-to-school season may turn out to be flat this year as consumers wait for technological upgrades before buying.

Back-to-school shopping, which usually helps fuel PC sales, may turn out to be flat this year as consumers wait for technological upgrades before buying, analysts said Wednesday.

Salomon Smith Barney analyst Rich Gardner cut estimates on PC makers Compaq Computer, Gateway and Dell Computer for 2002 and lowered his price targets on Compaq and Gateway. Lehman Brothers analyst Dan Niles cut earnings estimates for Intel and Advanced Micro Devices, which make chips for the devices.

Gardner said that one reason consumers may not be looking to buy this September is that the computers they already have are in good condition.

"The installed base in the U.S. is in very, very good shape. We have 64 percent household penetration, with 60 percent of those PCs less than 2 years old, and 80 percent less than 4 years old," he said.

People who do want to upgrade their systems will probably wait until October, when Microsoft releases its latest operating system, Windows XP.

In a research note, Niles echoed those observations, adding that a slowing economy would continue to depress sales.

"A rebate check from Uncle Sam may help, but continued layoffs in corporate America may prove to counteract some of that benefit," he said in the note.

With continuing slowness in the United States and Europe, as well as a price war, things aren't looking good for the PC market, Gardner said.

Gardner lowered his price target on Compaq from $24 to $18, and on Gateway from $20 to $16. He cut 2002 earnings-per-share estimates on Compaq from 97 cents to 73 cents, on Gateway from 85 cents to 72 cents, and on Dell from 73 cents to 68 cents. Those estimates are significantly below the Wall Street consensus.

Niles lowered estimates on Intel's fiscal 2001 earnings from 54 cents per share to 51 cents, and on Intel's fiscal 2002 earnings from 70 cents per share to 67 cents. He cut AMD earnings estimates from $1.25 per share to $1.20 for fiscal 2001, and from $1.45 per share to $1.40 for fiscal 2002.

"Those looking for a rebound in unit demand once PC inventory was depleted are actually seeing it" in the second quarter, Niles wrote. "This is a new revenue level for Intel that they will have to grow from."

Currency declines in Europe and Asia could also hurt demand there by making PCs more expensive. And growth in China appears to be slowing, Niles wrote.

A "free fall" in flash-memory pricing has also hurt Intel and AMD, Niles wrote. He said that pricing has dropped 25 percent to 50 percent in some cases, and most major long-term contracts have been renegotiated at lower prices.