Six weeks of booming growth have helped computer companies overcome seasonal depression.
The second quarter is historically the roughest of the year for computer makers, and when first-quarter results were released, many companies issued warnings that the second quarter would be flat or slightly off. But surprising profits have fueled strong growth in the sector: Stocks have jumped about 30 percent on average since July 1.
The biggest gainers include Compaq (CPQ), which has jumped 38 percent
to 65, Dell Computer (DELL) has jumped 33 percent to 87-7/8, and Silicon Graphics (SGI) has jumped 44 percent
Analysts say the growth is not without merit and investors should not be worried about computer securities being overvalued; price to earnings ratios have remained stable. In fact, they say waiting to get in on big stock growth may be a mistake as companies move into the stronger half of the year.
"The industry is remaining strong. For someone with a long-term time horizon, now is just as good a time as any," said Jeff Baker, an analyst with Principal Financial Securities.
"If you are worried about paying too much at an all-time high, take
advantage of daily pullbacks," Baker said. "But if you wait, chances are that stocks
will still be at 52-week highs."
Explaining the second quarter's traditional anemia, Baker said "The fourth quarter has the holidays pushing growth; European spending fuels Q1 as their fiscal year ends in March, so many companies are using up their budgets; Q3 is fueled by
corporate spending; but the second quarter is slow because a lot of people
are on vacation and there is nothing to push demand."
And while the computer sector as a whole has been experiencing some slowdown, there is no immediate reason to be concerned, Baker said.
The market slowed to the 20 percent range for past the five years, and is now
growing at rates in the upper teens, "but there aren't too many industries that are
growing at that rate," said Baker.
The consumer market has not been strong--part of the reason
for slowing growth--but sub-$1,000 personal computers could reverse that trend. It opened another 20 percent of the population in the United States as potential first-computer buyers, and it is also an opportunity for some households to purchase an additional computer, Baker said.
Companies that focus on the consumer market, such as Gateway 2000 (GTW), have managed
growth even amid slower consumer spending by broadening their product
offerings. Earlier this month, for example, Gateway said it will deliver a series of NT
workstations based on the Intel (INTC) Pentium II processor by the end of this year.
On the flip side, corporate spending has been strong with companies
making the transition from Windows 3.1 to NT and upgrading systems as processing speeds increased. Baker expects that growth will continue to be strong because
no one company owns a majority of the worldwide market, and "the
opportunity to expand is huge."
The larger companies will be the winners as the industry consolidates. They can afford to continue investing in the worldwide market and can take advantage of falling component prices by lowering prices to consumers. Smaller PC manufacturers cannot
afford to operate with strong pricing pressures. "Dell and Compaq will
pick up the business," said Baker.
He expects Dell's sustainable growth for the next three to five years to be
around 30 to 35 percent, and Compaq's growth to be about 25 percent.
For investors concerned about the economy's impact on stocks, the best
companies to purchase are the ones that can weather any type of pressure.
Here again, the big companies--Dell, Compaq, IBM--tend to be the first ones to
come back if there is a market correction, Baker said. "Smaller companies don't jump back as fast."
The computer maker with the largest gain since July 1 was Apple Computer, which has enjoyed a 48 percent jump in valuation. However, because Apple's stock reacted to the news of its new board of directors, rather than to its second-quarter jump in revenue and
earnings, it didn't follow the movement of the sector as a whole.
Apple did report a smaller-than-expected loss for the second quarter, its
stock started to trail off after the earnings announcement, until rumors of
Jobs joining the board of directors gave it a push.
Computer stocks rise with |
the summer heat
Apple Computer |
Compaq Computer |
Digital Equipment |
Gateway 2000 |
Dell Computer |
Silicon Graphics |
Sun Microsystems |
Tandem Computer |
Micron Electronics |
|Source: Data Broadcasting