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Analysts support HP, question Sun, NCR and IBM

    Analyst reaction to the Hewlett-Packard (NYSE: HWP) warning could have been worse Friday, but the aftershock led to downgrades in the server sector for Sun Microsystems (Nasdaq: SUNW) and NCR Corp. (NYSE: NCR).

    After market close, the computer giant said it would miss first quarter earnings estimates due to a slowdown in information technology (IT) spending. The company also said that sales growth is expected in the low- to mid-single digits and that no improvement was on the horizon until the second half of the year. HP shares slipped 1.94 to 30.44 Friday morning. Sun fell 1.94 to 30 while NCR was unchanged at 49.06.

    HP's inevitable decline

    Despite being downgraded to "buy" from "strong buy" a SG Cowen, a majority of analysts elected to cut estimates and maintain their ratings. At Prudential Securities, Bear Stearns, UBS Warburg, Merrill Lynch and Wasserstein Perella, 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 12- month price target reduced to $35.

    Estimates for the first quarter and fiscal year 2001 were also lowered at Merrill Lynch. The story was the same at Credit Suisse First Boston, where analyst Kevin A 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 Soloman Smith Barney, while analyst John B Jones Jr cut HP's price target, the real tough medicine was saved for server companies Sun and NCR Corp. 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 Jr. indicated that he believed IBM (NYSE: IBM) was in the strongest position out of the group. Shares slipped 0.81 to 92.88 Friday.

    Bear Stearns analyst Andrew J. Neff ageed noting that the bigger question raised from the HP announcement is what it means for EMC, IBM, and Sun

    Analyst Kimberly Alexy at Prudential Securities adopted a similar analysis, noting that the HP miss was not a surprise, electing 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.