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Sun and EMC downgraded

2 min read

Sun Microsystems (Nasdaq: SUNW) and EMC (NYSE: EMC) are being punished for the bad performance of their peers. Bear Stearns lowered its ratings on both stocks Friday citing "concerns about spreading economic weakness," though the companies themselves haven't indicated any trouble ahead.

Shares in Sun, which was also downgraded earlier this week on growth concerns, was down 0.91 to 30.78. EMC was off 3.13 to 71.5.

Andrew J. Neff at Bear Stearns lowered both companies to "attractive" from "buy," blaming an anticipated slowdown in corporate IT spending. While EMC and Sun are leaders in their respective fields and are well positioned, "gravity is bound to take over," he said.

"In our view (not based on any new company guidance or pronounced weakness in enterprise demand yet), this weakness across multiple economic sectors will likely have a negative impact on corporate IT spending that could put our revenue and earnings estimates at risk," Neff stated in a report.

Neff's outlook for the industry is bleak. He said weak consumer demand is spreading into small- to medium-sized companies and causing aggressive pricing in low-end servers.

"This weakness is bound to spread. With signs of a broader slowdown in the technology sector mounting, there is good potential for a slowdown in global IT spending, putting the financial performance of EMC and Sun (who are the beneficiaries of a large share of server-storage spending) at risk," Neff said. The analyst said through conversations with CEOs, CFOs and CIOs, he has noticed "an increasingly cautious tone now about business prospects and spending trends in key sectors in telecom, technology, industrial and financial services."

For EMC, Neff maintained earnings estimates of 23 cents a share for the fourth quarter, 78 cents a share for 2000, and $1.00 a share for 2001, though he said those estimates "are at risk."

On a positive note, Neff said he is confident about the company's "strong competitive position, its fast growing market opportunity in Data Storage, and its ability to deliver on investor expectations." He plans to revisit his rating "on signs of positive changes in macro conditions, better visibility in to corporate IT spending patterns and/or compelling valuation levels."

Neff also lowered Sun Microsystems' estimates. Earnings are now expected to be 16 cents a share for the second quarter, 70 cents a share for fiscal 2001 and 93 cents a share for 2002. These estimates are also at risk, given the slow down in IT spending and the economy in general.

Neff said he is still confident about the company's "competitive position, its ability to identify and penetrate new market opportunities, its ability to execute under a variety of difficult business conditions (Y2K, Asian weakness), and the upside from a new product cycle it has just entered.