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Asia woes take toll on Sun stock

The company's stock falls after an influential Wall Street analyst downgrades the shares based on concerns about sluggish sales in Asia.

Sun Microsystems stock fell nearly 6 percent in midday trading after an influential Wall Street analyst downgraded the stock based largely on concerns about sluggish sales in Asia.

It marks the latest example of Wall Street's jitters about the impact of the lingering economic crisis on technology stocks. A number of software and computer makers have been hit by the same problems.

Sun's shares closed today at 42.5, down 2.4375. The stock has traded as high as 53.3125 and as low as 30.375 during the past 52 weeks.

Salomon Smith Barney analyst John Jones Jr. cut his recommendation on Sun's stock to "outperform" from "buy." Jones also lowered his fiscal year 1999 earnings estimates for Sun to $2.65 per diluted share from $2.80.

"We are concerned that Asia/Pacific will continue to deteriorate due to the strength of the U.S. dollar, which makes Sun's systems more expensive," Jones wrote in his research report. "With the dollar projected to reach 160 yen and Japan 1998 GDP now projected to decrease by 2 percent, we believe that Sun's Asia/Pac revenue will be impacted further."

Sun investor relations manager Andrew Cassey said that about 12 percent of the company's sales come from Asia. Japan accounts for 10 percent, while Southeast Asia contributes about 2 percent, he said

"It's really the Asian weakness in general that is the problem," said Susan Crossley, an associate at Sutro & Company. "It's not specifically Sun's problem. As long as the Asian currency keeps heading down, computer makers are going to have a hard time."

Added Terry McCrary, an analyst at Waldron & Company: "Hewlett Packard and IBM have also had lower earnings because of Asia. But they haven't been hit as hard because they have a more diversified product line."

Many analysts said that Sun can weather its problems, noting that the company already has taken steps to keep a lid on costs and tighten production abroad.

The analysts noted, however, that a powerful tax cut and economic stimulus package would be the best way to spur a rebound in Asia.

"Tax breaks in Japan--[Sun's] largest foreign market--would help them get going," McCrary said. "[The tax breaks] can help stimulate corporate investment, which can only be a boost to Sun's situation."

Sun shares were up $1.50 yesterday on news that the company bought application server software maker NetDynamics. But today's downgrade by the Salomon analyst announcement erased those gains.

Sun is set to announce its fourth-quarter earnings July 16.

Meanwhile, Goldman Sachs analyst Laura Conigliaro trimmed earnings estimates for Hewlett Packard's third quarter by 3 cents a share, to 60 cents, and for the company's fourth quarter by 2 cents, to 84 cents. Conigliaro attributed the Asian financial crisis in part to her revised estimates.

Salomon's Jones also cut his third-quarter and fiscal year 1999 estimates for HP, noting that "Asia is taking a toll." But he maintained his "outperform" rating on the stock.

HP shares remained steady, however, trading at 57.6250 in midday, off less than 1 percent.

Reuters contributed to this report.