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The forecast for PC makers: gloomy

Merrill Lynch delivers bad news to PC manufacturers with a forecast of rapidly declining prices and profits.

Merrill Lynch delivered bad news to PC manufacturers today with a forecast of rapidly declining prices and profits.

Steve Fortuna, PC hardware analyst for Merrill Lynch, attributed the problem to the overwhelming popularity of low-cost PCs and manufacturers' inability to recover profits by bundling add-on components.

And the plunge will continue, the influential investment house said. The PC average unit price is expected to fall 11.5 percent in 1999 and 12.1 percent, 11 percent, and 10 percent in 2000, 2001, and 2002, respectively.

Overall PC sales growth will also decline. Merrill Lynch forecasted growth of 20.8 percent and 17.4 percent in 1999 and 2000, respectively, and 14.4 percent in 2001 and 12.5 percent in 2002.

PC revenue growth will also decline. Merrill Lynch predicted 7 percent growth this year and 3.3 percent in 2000, 1.8 percent in 2001 and 1.3 percent in 2002.

Worldwide, the United States suffers from a saturated corporate PC market, which generates most sales in the form of replacement systems. But the market will benefit from last-minute small- and medium-business sales related to the Year 2000 technology glitch.

Europe is expected to be a robust market, both in the sale of corporate and consumer PCs, as well as Asia Pacific as pent up demand explodes following the regional recession.

Merrill Lynch, in conjunction with market researcher Dataquest, estimated the PC average unit price in the United States would drop from near $1,800 this year to $1,537 and $1,365, respectively in 2000 and 2001. This translates to price declines of 11.5 percent, 12.5 percent, and 11.2 percent.

Merrill Lynch also re-evaluated the top-three direct PC manufacturers, Dell Computer, Gateway, and Micron.

Fortuna concluded all three companies are vulnerable to changing market conditions and that each, working on its strengths, could at least slow down the impact.

Dell, for which Merrill Lynch predicted earnings of 75 cents and 95 cents a share respectively in fiscal 2000 and 2001, will benefit from strong international demand and sales of servers, storage, and notebooks.

But Merrill Lynch forecasted average unit price declines of 9 percent in 2000 and 11 percent in 2001. Revenues would grow 42 percent and 30 percent, respectively, for both years.

Merrill Lynch rated Dell neutral for the intermediate term and buy long term.

Gateway fared less well, with a risk-reward profile of unattractive and neutral for the intermediate term and accumulate long term.

Merrill Lynch predicted Gateway's average unit price would decline 13 percent this year and 14 percent in fiscal 2000, with expected revenue growth of 18 percent and 17 percent. Estimated share price is $2.85 in 1999 and $3.40 in 2000.

Fortuna saw Micron's situation to be more perilous, despite good stock performance, as the company?s growth is squeezed into the commercial and mid-market spaces. Merrill Lynch predicted 33 cents and 42 cents per share in fiscal 1999 and 2000.

Micron's average unit price is expected to fall by 15 percent in fiscal 2000, with revenue growth of just 7 percent.