It was another skittish day on Wall Street today, as PC and chip stocks were hurt by analysts' war of words.
Analyst recommendations that pulled in opposite directions fueled the nervousness of investors, who already were rocked by a record one-day point decline followed by a record one-day point rise earlier this week.
Like spectators at a tennis match, investors were volleyed back and forth between analysts who noted that, on one hand, the computing sector is growing, but that, on the other hand, pricing pressure will cut into earnings. As a result, personal computer manufacturers, chip makers, and component makers all will be affected, analysts said.
Despite the fact that there was both positive and negative reinforcement from analysts, PC and chip stocks lost ground today. Dell Computer (DELL) dropped 5-1/2 to end the day at 78; Compaq Computer (CPQ) lost 2-3/16 to end at 61-1/4; IBM (IBM) fell 2-7/16 to end at 95-13/16; and Intel (INTC) dropped 4-1/2 to end at 75-3/4.
Richard Gardner Jr., an analyst at Salomon Brothers, restarted coverage on Dell and Compaq, and in the process upgraded both of them to "buy" from "hold."
Lucy Painter, an analyst at Merrill Lynch, reiterated her "strong buy" rating on Compaq and her "buy" rating on Dell.
Bankers Trust Alex.Brown, however, lowered its rating on both stocks to "buy" from "strong buy."
The pricing pressure on personal computers is like an early warning sign that could lead to an earnings shortfall, said David Thor, an analyst at Boston Equity Research Group. He added that the average selling-price declines could take money out of everyone's pocket, including Intel, even if semiconductor demand is strong.
In light of this symbiotic relationship, investor concern already has seeped over from the PC sector into the chip sector.
Charles Boucher, an analyst at UBS Securities, downgraded Intel to "hold" from "buy." He cut his 1997 earnings estimate to $3.76 per share from $3.78, and his 1998 estimate to $4 from $4.50.
However, Boucher cited a belief that Intel experienced weakness in October microprocessor unit shipments and bookings due to slowing PC consumption in Asia, rather than pricing pressure in the PC market. He added that worldwide PC growth likely will fall below Wall Street's expectations in the fourth quarter and in 1998.
In contrast, Jeff Baker, an analyst at Principal Financial Securities, directly attributes the sell-off to the recent volatility. He noted that when the markets get nervous, a lot of portfolio managers lock in profits, creating a sell-off that pushes stock prices lower.
"We need to remember that there is nothing fundamentally different from two weeks ago or six months ago," Baker said. "Demand is still good and there is definitely still growth."