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Gateway stock jumps 17 percent

Gateway 2000 gets a boost in trading after an analyst gives the computer maker a positive plug and ups his rating on its stock.

    Gateway 2000 (GTW) got a boost in trading today after an analyst gave the computer maker a positive plug and upped his rating on its stock.

    The company's stock jumped as much as 5-3/16, or 17 percent, before ending the day at 34-3/16, from yesterday's close of 29-13/16. It was the most actively traded security on the New York Stock Exchange, with more than 10 million shares traded hands.

    Prudential Securities analyst Don Young raised his rating on the direct marketer of PCs to "buy" from "hold."

    In his report released with the rating change, the analyst said the company is a likely acquisition candidate.

    "We believe Gateway is likely to be the leading acquisition target of the indirect PC brands as they implement multi-channel distribution strategies. The era of multi-channel distribution is beginning now for the second-tier PC brands, and by year end for the first-tier PC suppliers," said Young.

    But other analysts say Young's assessment is just speculation.

    Kurt King, an analyst with Montgomery Securities, said that while Gateway has room for upside potential, there is little evidence that the company has figured out how to move aggressively into the corporate market while holding onto its position in the consumer and small business arena.

    "Dell has become aggressive and that is not going to change," King said. "Gateway, for the most part, has misunderstood that area. It is doing a better job and a turnaround is possible, but at this point, we are at the 'show me' stage."

    Young added that the real improvement in Gateway is not in the near term. "While we may be early with this upgrade, since little tangible improvement in operating results is expected before [the first half of 1998], we find the valuation and acquisition potential compelling."

    "The PC industry will shortly enter a new phase where the leading indirect PC brands will launch direct channel initiatives," said Young. "Due to the scale requirements for the direct-distribution model, limited market size of the direct channel, existing market share concentration of direct competitors, the major indirect PC players will likely use acquisition of existing players to enter the channel. Gateway 2000 is the most attractively positioned and valued direct player, and as such will be hotly pursued."

    Gateway hit its 52-week high of 46-1/4 in July before warning later in the quarter that it would miss expectations for the period ending in September.

    After the warning, Gateway lost about 18 percent in two days. The stock continued sinking, losing about 37 percent of its value since July. Today's upgrade has reversed some of those losses.

    Analysts now are expecting profits of 12 cents a share, according to First Call. That is a downwardly revised consensus estimate. Previously, analysts had the company pegged at 47 cents per share.

    In a cost-saving effort, Gateway announced recently that it would lay off about 300 employees worldwide as it undergoes a restructuring. That represents about 2 percent of the company's workforce of around 12,000.

    The company has been facing increased competition from other direct makers of PCs, such as Dell Computer, as it branches out into the consumer market, Gateway's bread and butter.

    At a recent analyst conference in San Francisco, Gateway acknowledged the tough competition, but said there is enough room for both companies in the consumer marketplace.