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Analysts save Dell from certain free fall

Dell Computer Corp. (Nasdaq: DELL) shares fell only 7/8 to 39 1/2 Thursday after telling Wall Street that its fourth-quarter earnings will fall a nickel short of analysts' estimates. Surprisingly, most analysts came to Dell's defense.

Citing an "inconsistent" flow of key semiconductor components, Dell said it will likely post a profit of $430 million, or 16 cents a share, on sales of $6.7 billion.

First Call consensus expected the PC maker to earn 21 cents a share in the quarter.

On Thursday, Deutsche Banc Alex Brown and SG Cowen both cut the stock from a "strong buy" to a "buy" recommendation.

But Chase H&Q, Merrill Lynch, Robertson Stephens and Piper Jaffray all upgraded the stock.

Robertson Stephens analyst Dan Niles bumped the stock from a long-term "attractive" rating to "buy" and set a 12-month price target of $50 a share.

"As we stated in a prior report, once expectations were reset, we would become more bullish based on a rebound in corporate demand and demand generated by the Windows 2000 launch," Niles said in a research note.

Piper Jaffray's Ashok Kumar said despite the warning, he expects sales to improve 38 percent in fiscal 2000.

"Resetting expectations is not indicative of weakening fundamentals or a deteriorating macro environment, but positions the company to post meaningful upside come hell or high water," Kumar said in a research report. "This is not a reflection of a secular slowdown, but a digestion phase that must be endured to absorb the pre-emptive Y2K purchases."

For the year, Dell expects to earn $1.8 billion, or 68 cents a share, on sales of $25 billion.

Merrill Lynch analyst Steve Fortuna, who predicted this announcement a couple of weeks ago, also upgraded the stock from a near-term "neutral" rating to a near-term "buy."

Last quarter, Dell met lowered estimates after issuing a similar profit warning. In the quarter, it made $483 million, or 18 cents a share, on sales of $6.78 billion.

In its release, Dell said that a significant factor behind the revised outlook was an uneven and constrained supply of semiconductor components during the quarter. This caused $300 million in lost sales, primarily of newly introduced consumer products.

Corporate demand following the Y2K rollover was lower than anticipated, reducing expected revenue by about $500 million. The company nonetheless expects its global fourth-quarter sales to corporate and institutional accounts to increase more than 20 percent from the year-ago period, which the company believes is a multiple of the industry rate.

"While we're clearly disappointed with our operating results, our overall business is healthy and we believe Dell will continue to significantly outpace the revenue and profit growth of our major competitors and of the industry at large," said CFO Tom Meredith in a prepared release.

Dell shares moved up to a 52-week high of 55 in February before swooning to a low of 31 3/8 in June.

Thirty-one of the 36 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

Analysts were forecasting a profit of $1.03 a share in fiscal 2000.