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Compaq, Intel feel the heat

Compaq's stock gets hit today after the company told analysts that sales were off. Intel also slips while Micron warns of lower sales.

Compaq was battered in early trading today after telling analysts that sales were off for the first part of the year and Intel's stock declined as the processor price war continues.

Meanwhile, Micron Electronics said that its net sales and net income levels for the second fiscal quarter of 1999 ending Thursday will fall six to nine percent below levels experienced in the first fiscal quarter. In addtion, Micron, which made the announcement after the market closed, blamed pricing pressure and a lull in purchasing caused by anticipation of the Pentium III.

Compaq's slide comes on the heels from warnings from Compaq management that computer sales to medium-sized businesses were lower than expected for January and February, a segment targeted by Compaq's direct sales efforts. Sales to large companies and consumers were on track, said a company spokesman, but the medium-sized segment was lagging below expectations.

The warning sent analysts scurrying to recast their revenue and earnings estimates for the Houston-based company. Compaq's stock has dropped to $33.25 a share in mid-afternoon trading, a six percent decline from last Friday. Late in February, Compaq sold for $44 a share.

Interestingly, Compaq had been, until recently, touting its advances in the medium-sized business segment. The company last year created the Prosignia line of PCs for this segment and beefed up its direct sales programs to specifically serve these customers. Compaq said recently that it was selling over $1 million a day in Prosignia products over its Web site.

Last year at this time, Compaq roiled Wall Street by announcing that a surplus would eliminate profits for the first quarter. Compaq wrestled with the inventory problem for six months.

Opinions are split on whether the shortfall is an indication of a slowdown in the PC industry or a case of myopia. Earlier this month, Dell fell short of revenue estimates for its fiscal first quarter, which was interpreted as a sign that PC buying was slowing.

On the other hand, the first part of the year is typically slow and the large PC makers continue to take market share away from other vendors. Dell, after all, still experienced a 38 percent growth in its first fiscal quarter. In addition, expectations for a stronger than usual first quarter have been fueled by a surge in PC buying in the last part of the year.

Among the naysayers, Merrill Lynch analyst Steve Milunovich slashed his first quarter earnings estimate on Compaq to 30 cents a share from 35 cents on the heels of the announcements from Compaq, while Mike Kwatinetz, of brokerage CS First Boston, dropped his quarterly projection to 31 cents a share from 36 cents.

Salomon Smith Barney analyst Richard Gardner lowered his earnings per share estimates from 34 cents to 30 cents for the first quarter on Compaq but for a different reason. The devaluation of Brazil's currency has dropped the value of the company's inventory by $100 million, which is the chief cause of the revenue shortfall.

While he acknowledged Compaq's admitted shortfall, Gardner did not believe it spelled a trend, yet.

"While we agree that the corporate PC market is no longer growing at the same rates as in the June and September quarters of 1998, we are not prepared to conclude based on several months of slower growth that there is a fundamental problem with PC demand--January and February are never great indicators of how March quarter demand as a whole will come in."

Intel closed down 2.40 percent. The company recently released the Pentium III, but has been locked in a price war with rival AMD.

Charles Boucher, meanwhile, an analyst with Donaldson, Lufkin & Jeanrette shifted his rating from "market outperform" to "buy."

Reuters contributed to this story.