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Distributor woes raise warning flags

Computer distributor stocks sink as two of the largest players say they will miss revenue targets, a sign that PC demand may be slowing.

Computer distributor stocks got hammered today as two of the largest players said they would miss fourth-quarter revenue targets, a warning sign that PC demand may be slowing.

Late yesterday, both Ingram Micro, the world's largest PC distributor, and Inacom said their respective sales would not be as high as expected this quarter. Ingram said it expected a profit of $73 million to $75 million, or 48 cents to 50 cents per share on roughly flat revenue sequentially. Ingram was expected to earn 56 cents, according to the average of analysts surveyed by First Call.

Shares of Ingram Micro fell 3.062 to 33.93 today, down 8.28 percent. Inacom fell 3.75 to 15.37, a drop of 19.61 percent.

Both companies said the problem lay with the changing nature of the distribution business, not overall PC demand. Indeed, Intel and some PC vendors continue to rise on the strength of sales estimates.

But at least one analyst said that the turmoil among distributors should be read as a sign of caution that PC sales for the fourth quarter may not be as good as expected.

"We continue to think that PC growth is good, but is not over the top," said Gillian Munson, a PC analyst with Morgan Stanley. "It is important to note that we believe that some risk has been added into the shares of many of the PC players, as the market may be pricing an over-the-top PC environment into these stocks."

Dell, she added, will enjoy revenue growth of about 47 percent this quarter, compared to the same quarter from a year before, and Compaq should grow as well.

Still, Munson said that a "yellow flag" of caution has to be raised. "We think that risk levels in the PC sector went up a tad last night," she said.

Meanwhile, Intel surged on analyst reports that the company will beat earlier estimates because of increasing demand for PCs. Both Merrill Lynch and Morgan Stanley Dean Witter recently upgraded earnings forecasts for the chip vendors largely on the strength of fourth-quarter purchasing. PC sales, according to projections from International Data Corporation, will be 12.2 percent larger than the same quarter the year before and 19.8 percent larger than the previous quarter.

The trend is expected to continue in the first quarter, according to Mark Edelstone, an analyst with Morgan, and result in a stronger-than-usual sales quarter for manufacturers. This contrasts strongly with the first half of 1998 when bloated inventories resulted in layoffs and lower-than-expected earnings at semiconductor makers, Morgan Stanley pointed out.

Intel gained today, along with computer makers Dell, IBM, and Hewlett-Packard.

Intel is an investor in CNET: The Computer Network, publisher of News.com.