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HP's earnings warning sparks server-market worries

Reaction to Hewlett-Packard's first-quarter warning is not as bad as it could be, but it reveals more widespread worries about server makers, including Sun and NCR.

Analysts' reactions to Hewlett-Packard's warning could have been worse Friday, but the aftershock revealed more widespread worries about the server sector.

After the close of the market Thursday, the computer giant said it would miss first-quarter earnings estimates due to a slowdown in information technology spending.

The Palo Alto, Calif.-based company also said sales growth is expected to be in the low- to mid-single digits and that no improvement is on the horizon until the second half of the year. HP shares slipped $1.75, or about 5 percent, to $30.63 Friday morning.

In the wake of HP's announcement, fellow server maker Sun Microsystems fell 94 cents, or 3 percent, to $31, while NCR was down $4.19, or 8 percent, to $48.44.

An expected decline
Despite HP's being downgraded to "buy" from "strong buy" at SG Cowen Securities, a majority of analysts decided to cut estimates and maintain their ratings. The prevailing view was that the spending slowdown--and inevitable decline in HP's performance--was flagged weeks ago.

At Wasserstein Perella, the stock's "hold" rating was maintained, while earnings targets for 2001 were cut and the 12-month price target fell to $35.

Estimates for the first quarter and for fiscal year 2001 were also lowered at Merrill Lynch. The story was the same at Credit Suisse First Boston, where analyst Kevin McCarthy maintained a "hold" rating on the stock but cut fiscal 2001 earnings estimates and lowered the price target to $25.

Downgrading the sector
But the real theme emerging from a host of analysts was the declining health of the server sector as indicated in HP's warning.

At Salomon Smith Barney, analyst John B. Jones Jr. cut HP's price target but saved the strong medicine for server companies Sun and NCR. The analyst lowered earnings estimates and 12-month target prices for both companies, and cut ratings from "1" to "3" for Sun and "1" to "2" for NCR.

Jones indicated that IBM seemed in the strongest position of the group. Its shares slipped $1.13, or a little over 1 percent, to $94.81 Friday.

Bear Stearns analyst Andrew Neff was in agreement, noting that the bigger question raised by the HP announcement is its meaning for EMC, IBM and Sun.

Analyst Kimberly Alexy at Prudential Securities adopted a similar analysis, noting that the HP miss was not a surprise. She elected to maintain an "accumulate" rating, lowering estimates for the first quarter and fiscal year and cutting the price target to $36.

"We also remain concerned about risk to IBM and Sun shares as a result of weakness in enterprise demand," she added.