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Analysts expect Dell to trim outlook

The PC maker will probably meet its second-quarter estimates but lower its outlook for the third quarter, say analysts.

Dell Computer will probably meet its second-quarter estimates but lower its outlook for the third quarter, said analysts, who argue that lower inventories and the launch of Windows XP aren't likely to save the next quarter.

Shares in the PC maker have risen around 12 percent since January, compared with a decline of 30 percent overall for the Nasdaq. But the stock was off 91 cents to $25.66 Wednesday as analysts came out with predictions about its second-quarter report, due after Thursday's closing bell.

First Call's consensus estimate predicts Dell to make 16 cents a share on revenue of $7.71 billion. Analysts say the company can easily make those numbers, with revenue being closer to the low end of its pre-announced $7.6 billion to $7.8 billion range. Dell reaffirmed its earnings forecast, but slightly trimmed its sales target last month.

Most analysts are predicting Dell will lower its projections for the third quarter, as the sought-after fixes for the PC sector fail to materialize.

Wall Street has been down on the PC industry for a while now, as the high-tech boxes have become little more than commodities caught in a supply glut.

There's no end in sight for the raging price wars between leaders Dell, Compaq Computer and Gateway, and analysts have already predicted that the industry should abandon hope of a pickup in sales from back-to-school shopping. Now they're saying recent talk of a return to normal inventory levels and an upswing in buying inspired by Microsoft's new operating system, Windows XP, should also be ignored.

Dell will predict "flattish sequential growth for the third quarter," predicted Credit Suisse First Boston analyst Kevin McCarthy. That's a step down from the slight increase that First Call expected, which was 17 cents a share on $7.96 billion.

McCarthy cut his sales targets to $7.65 billion from $8 billion for the third quarter and also lowered earnings expectations for fiscal 2002 and 2003. He predicts the company will bring in 68 cents a share and 70 cents a share, respectively. First Call had been estimating 69 cents for fiscal 2002 and 87 cents for fiscal 2003.

SG Cowen Securities analyst Richard Chu said he was maintaining below-consensus estimates for third-quarter revenue of around $7.8 billion due to weak demand in the United States and slowing demand in Europe and Asia.

The price war blues
Other analysts went as far as to lower their rating on Dell ahead of its second-quarter report. A.G. Edwards analyst Brett Miller dropped the stock to "reduce" from "buy/speculative." The decision was based on expectations that Dell will lower the bar for its third quarter, but also on perceptions of more difficulty stemming from inventory problems and the ongoing price war.

"Virtually all technology markets continue to be faced by high inventories," Miller said. Though PC companies have gotten inventory slightly more under control, the dynamics that sparked the price wars among PC makers are still going strong; slowing growth in demand for PCs, dropping prices in components, and fierce battles for market share will continue to dent revenue for companies like Dell, Miller predicted.

Miller also said that while Windows XP may have a minor impact on demand, it's most likely that people will migrate to it slowly.

Chu likewise dismissed speculation that the new operating system would spark a spending spree. "We are skeptical of any sustained case for PC demand stemming from Windows XP and a corporate replacement cycle," Chu wrote.

The only positive note that analysts cited for Dell was its ability to keep grabbing market share from competitors.

"Dell's low-cost structure and operational efficiencies continue to give it the ability to pass along materials cost declines to the customer more aggressively than its competitors," said Robertson Stephens analyst Eric Rothdeutsch, who predicts Dell should continue to increase its market share, as it has for the past five years.

The company should be able to move its market share from 12 percent in the first quarter to between 13 percent and 14 percent in the second half despite the tough economic climate, Chu said.

But the market-share gains are likely to come at a continuing cost to margins as Dell drops prices to keep up with Compaq. The battle is intensifying as the two companies fight for a piece of the pie in the server market, analysts cautioned.

As for the stock, Dell still has its reputation as a once high-flying stock.

"We are 'reducing' the shares versus 'selling' them on the belief that the market still is enamored with numerous previous high-growth stocks and could drive these shares higher on market rallies," Miller wrote. But the only positive that investors should see in these rallies is an exit opportunity, he added.