Dell shares sink following profit warning

Dell shares slide in trading following a warning that fourth-quarter profits would slow. The PC maker is just the latest to report an earnings shortfall.

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Dell shares declined in trading today, following a fourth-quarter profit warning yesterday.

At the 1 p.m. PST close of regular trading, shares had dipped as low as $37.63, a $2.75 or 6.81 percent drop.

The PC maker yesterday warned its fourth-quarter profits would fall 6 cents less than expectations, to $430 million, or 15 cents a share.

"Obviously it was a major miss, which is not good," said Merrill Lynch analyst Steven Fortuna. "But the good news is it finally caused the management to capitulate in respect to lowering the long-term growth rate of the company to the low 30 percent range from the high 30 percent range."

Dell's profit warning is its second in recent months and comes on the heels of slower-than-expected PC sales during the lucrative holiday buying season. The change in buying patterns raises questions whether the PC market can sustain its recent rocket growth.

Merrill Lynch's Fortuna early today upgraded Dell stock from "neutral" to "buy," in part on Dell's revised growth rate expectations. He also based his revised rating on the firm's market performance in servers and notebooks.

Chase Hambrecht & Quist analyst Walter Winnitzki also upgraded the stock, from "market perform" to "buy." Ashok Kumar, an analyst at US Bancorp Piper Jaffray, upgraded Dell from "buy" to "strong buy."

But Deutsche Bank Alex. Brown analyst Philip Rueppel downgraded Dell from "strong buy" to "buy."

Kumar voiced similar sentiments as Fortuna. "If you look last year at Dell's stock, it grossly underperformed in broad market indexes, in spite of having grown revenue of 38 percent. The momentum money essentially drained out of the stock last year, so the company was barely struggling to meet the consensus toward expectations of 40 percent," he said.

Kumar added that "having the company reset the bar to a much more meaningful level" means "the strength should return to the stock."

Dell attributed its profit problem to $300 million in lost consumer PC sales due to Intel processor supply shortages and another $500 million in lost corporate sales due to the Y2K technology glitch.

Dell issued its warning after the 1 p.m. PST close of regular trading yesterday, sending its stock down about $4 to $36.38 in after-hours trading.

Dell's warning also shook other high-tech stocks. Shares in Micron Electronics slipped about 31 cents to $10.88 in early trading before coming back into positive territory, edging up 6 cents to $11.25 at the 1 p.m. PST close of regular trading. Apple fell 19 cents to $110 and Compaq dropped 94 cents to $27.94. Shares in IBM were down $3.25 to $113.25 and Hewlett-Packard was down 31 cents to $108.44.

Fortuna predicted Dell's stock would take a hit today, the next several weeks and maybe throughout the first quarter. "But thereafter, we're going to have numbers out on the street that are going to be doable and achievable comfortably. Though the growth rate of the company has gone down, the risk profile going forward has also come down."

For Compaq, which announced its fourth-quarter earnings on Tuesday, Y2K and some component problems hurt gross margins, but the problems had a negligible impact on sales. Unlike Dell, which relies on Intel for microprocessors, Compaq also uses chips from AMD. About a third of Compaq consumer systems, for example, ship with processors from the Intel rival, which has a better track record supplying chips.

Compaq CEO Michael Capellas told financial analysts on Tuesday that he expected first-quarter revenue to decrease because of a typical seasonal slowdown. But "the first quarter will be a little more backloaded than usual due to the release of Windows 2000 in mid February."

Compaq expects some sales slowdown as corporations make the transition from Windows NT to Windows 2000. Compaq will clarify its first-quarter outlook tomorrow at its annual meeting with financial analysts.

For now, Fortuna remains bullish on Dell. "We don't think anything fundamental has changed here with Dell, although on the surface it may look that way," Fortuna said.

"Even without the issues in the fourth quarter, they would have had to find a way to guide the Street down. This company was struggling against an unrealistically high and unsustainably high top- and bottom-line growth number."