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Wall Street: Dell playing it safe

Analysts view the third-quarter profit warning as good news--evidence that the PC maker is maintaining the cautious stance that lets it meet estimates while rivals struggle.

Analysts took Dell Computer's third-quarter profit warning as good news Friday--evidence that the company is maintaining the cautious stance that has enabled it to continue to meet estimates while its competitors buckle.

Though investors sent shares down $2.38, or 9 percent, to $23 at market close Friday, analysts maintained their ratings and said the long-term picture for the PC maker is still rosy.

CNET's PC Hardware index was down about 2.5 percent Friday, as two of its competitors declined: Gateway fell 14 cents to $10.10, and Hewlett-Packard, which also reported its quarterly results Thursday, lost 8 cents to $24.05. Compaq Computer was up 12 cents to $14.11.

After the bell Thursday, Dell managed to hit targets despite slowing sales. The company reported a profit of $433 million, or 16 cents per share, on sales of 7.61 billion, roughly flat with last year's $7.67 billion.

First Call had predicted second-quarter profits of 16 cents a share on sales of $7.7 billion.

But the computer maker also said revenue for the third quarter will be down 5 percent from the second quarter, and earnings will be between 15 cents a share to 16 cents a share. First Call had been expecting the company to earn 17 cents a share. The warning was already expected on Wall Street, though some analysts expressed surprise at its magnitude.

Dell said it isn't counting on a recovery any time before spring of 2002, but analysts took that as a good sign. While lowering their revenue and earnings projections, analysts also praised the company for being cautious about a recovery, and said Dell was still the best-positioned in its industry.

"Nothing that Dell did or said as it reported its July quarter results changes the long-term story," Goldman Sachs analyst Joe Moore said in a research note. He lowered his estimates for the third quarter to 15 cents a share from 16 cents a share, 2002 estimates to 64 cents a share from 66 cents a share, and 2003 estimates to 83 cents a share from 90 cents a share. Moore added that the company's statement that it doesn't expect a recovery until spring 2002 may "rattle the market somewhat," but pointed out that "all the company requires to start sequentially growing revenues and earnings is a stable environment."

Moore also observed that for three consecutive quarters, Dell has given a more cautious outlook than competitors, and is the only company that hasn't had to issue a warning.

"We think the company is playing it cautious for good reason," wrote Morgan Stanley analyst Gillian Munson in a research note. Munson called the company's prediction for a 5 percent decline in revenue "conservative," given that it predicts industry growth will be down 5 percent to 10 percent, and pointed out that Dell's growth was a much higher multiple of industry growth in the second quarter. She added that the conservative guidance sends a twofold message to investors and competitors: Don't be optimistic about the speed of an economic recovery, and don't expect Dell to let up on pricing pressure.

Dell has been in a price war with Gateway and Compaq as demand for PCs continues to wane. Analysts said they see no end to the price battle in sight, which will continue to dent sales. But analysts also said Dell appeared to be winning, based on an increase in market share.

"The real take-away (of Dell's report) was that the company continued to gain market share at an impressive clip while at the same time maintaining its profit levels in a weak environment," said Merrill Lynch analyst Steven Fortuna, who maintained a "buy" rating. "Dell outperformed the industry across all geographic and product segments."

Separately, Dell also said Friday morning that 600 employees in Europe have been laid off during the past quarter as part of its plan to shed 3,000 positions.