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Gateway shares slump ahead of analyst meeting

Wall Street is worried about the PC maker's prospects after Merrill Lynch downgrades the stock ahead of the company's upcoming meeting with analysts.

Gateway's prospects worried Wall Street on Tuesday after Merrill Lynch downgraded the stock and said the company would probably cut its outlook at an upcoming analyst meeting.

Gateway shares closed down $1.09, or 6 percent, to $16.72.

On Tuesday, Merrill Lynch downgraded the stock to "neutral" from "accumulate" on expectations Gateway will lower its 2001 financial targets at the analyst meeting.

The company will hold its annual analyst meeting Tuesday evening and Wednesday in San Diego, Calif. The official reason for the meeting is the re-introduction of the "new old" management team. In late January, the company's founder and chairman Ted Waitt stepped back in as CEO to get his struggling company back on track. Gateway also replaced its chief financial officer in the management shakeup.

But analysts are expecting Gateway to lower its 2001 targets as a second-half rebound in the U.S. economy increasingly looks like a long shot. Meanwhile, Gateway management has said the company will compete in a PC price war, a move that will pressure profit margins.

"We would consider using any strength in the stock around the analyst meeting as an opportunity to exit the shares," Merrill Lynch analyst Steven Fortuna said in a research note. "We think there is a high likelihood that management significantly lowers its (earnings per share) outlook during its analyst meeting this week, well below the current $1.28 Street consensus."

Fortuna added that he expects to revise estimates after the analyst meeting. Fortuna said he downgraded Gateway on the presumption that consumer demand is unlikely to bounce back in the second half of the year. In addition, management will need time to retool Gateway.

The stock is now trading at around 15 times 2001 earnings estimates, but if Gateway cuts its earnings outlook "the stock could easily follow it," he said.

Fortuna wasn't the only analyst expecting bad news. Salomon Smith Barney analyst Richard Gardner reiterated his "neutral, high risk" rating and predicted the company "is likely to reduce earnings guidance for fiscal 2001 below the current consensus."

UBS Warburg analyst Don Young was more optimistic, maintaining his "strong buy" rating.

"We are maintaining a positive outlook on the stock as Ted Waitt is returning to re-establish Gateway's value leadership position," Young said in a research note.

Though Young was upbeat on expectations that management will outline a more aggressive strategy to establish pricing leadership, he had already cut his fiscal year earnings estimates. The analyst also said he expects "the stock to be pressured as the Street will likely cut estimates to reflect management's new strategy."