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Prudential sees light at end of tech slump

The investment firm says in a new report that technology earnings will worsen before they pick up again, but that ultimately they will grow 13.7 percent for the decade.

Technology earnings will get worse before they get better, but don't fret--things will improve.

That's the word from Prudential Securities, which issued a new report Monday predicting "normal" tech earnings growth of 13.7 percent for the decade.

But while things will pick up again, investors will need to be in it for the long haul, Prudential analyst Ed Keon wrote in a research note. It may take until 2003 or later for tech earnings to regain the pace they had before the dot-com crash.

For this year, Keon said tech earnings will be at least 40 percent, or possibly 50 percent, lower than they were in 2000.

The Prudential report examined the companies that make up the Standard & Poor's 500 index, which the analyst firm divided into tech and non-tech stocks. It used basic earnings-per-share figures before special charges.

Technology sales had a remarkable growth going back, Keon pointed out. For example, in 1984, they grew an average of 11.1 percent, compared with 8.4 percent growth for non-tech sales. But the tech companies' peaks and valleys have been much sharper than for non-tech companies.

Progress leads to growth
"We could talk about the increasing role of technology in our business and commercial lives, about the productivity-enhancing benefits of technology, about the PC and the Internet, but we think a more basic economic reason makes sense," Keon wrote.

"Tech sales and profits have been superior because tremendous scientific progress has meant that tech stuff has gotten better and cheaper relative to other stuff. So the cost/value trade-off favors tech more each year, and therefore tech gains share in the economy."

He added that while there are always small companies posting extraordinary growth, their smallness is what helps produce the tremendous percentage gains. As those companies get larger, their growth slows.

Keon said the current earnings slowdown "may not reverse as quickly or as decisively as we might hope," adding that it could take until 2003 or later for techs to regain their earlier growth rates.

That means the "2002 tech earnings forecasts may be too high and need to be revised," he said.

Looking forward, Keon said that once the 2001 low point is behind the industry, tech sales should grow about 10 percent a year until 2010, with margins ending up at the 1984 to 2000 average of 6.54 percent.

"We would not want to abandon tech now," Keon wrote.

"For many long-term investors, we think a diversified portfolio with a slight tech tilt makes sense," he added. "In the short run, the tech tilt may not help portfolio performance. But looking ahead, we continue to think that tech stocks will deliver the earnings growth necessary to justify today's premium valuations."