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Gateway stock bounces back

The PC maker's stock bounces back unexpectedly after losing ground on warnings that second-quarter results will miss estimates.

Gateway 2000's (GTW) stock made an unexpected turnaround after dropping 10 percent yesterday on warnings that second-quarter results will miss analysts' estimates.

Investors unexpectedly pushed the stock up almost 6 percent today to close at 32, up 1-3/4 from yesterday, despite the company's warnings.

Wall Street analysts, meanwhile, were expecting Gateway to report profits of 90 cents per share, according to First Call, but revisions are on the way.

The computer maker was downgraded by Donaldson, Lufkin & Jenrette to "market perform" from "buy," while SoundView Financial trimmed its earnings per share expectations to 71 cents per share from 91 cents a share for the second quarter. The firm also cut fiscal 1997 estimates to $3.80 from $4.12 a share and lowered fiscal 1998 earnings estimates to $4.71 from $4.73 a share, but kept its short-term and long-term rating of "buy."

Ashok Kumar, an analyst with Southcoast Capital, said investors should expect about a 10 percent drop in the near future. He expects the stock to level off around 25.

He added that the market for personal computers grew 25 percent in 1996, but growth is expected to slow to only 15 percent this year. "There is oversupply across the board and a lot of earnings numbers will have to get readjusted. This is not unique to Gateway."

In a report released this morning, Southcoast Capital said: "Compounding the unit growth slowdown, we expect average unit price to show negative persistence. We believe the penetration at traditional Gateway accounts, the bleeding-edge consumer, is saturated, and the incremental customer today is more price-sensitive."

The report added that as slow unit demand is compounded with decreasing average unit prices, weak revenue at other original equipment manufacturers is also expected.

Increased operating expenses and a later-than-expected seasonal spike in sales are the culprits pushing second-quarter results off the mark, Gateway chairman Ted Waitt told institutional investors attending a New York conference yesterday.

Revenue for the quarter ending June 30 will be flat, compared with the previous quarter, he said. The company had reported revenue of $1.4 billion and a net income of $67.5 million in that first quarter. However, it expects revenues to exceed the $1.1 billion reported in the year-ago quarter, Waitt added.

Gateway's stock took a beating earlier this month, when speculation surfaced that it would issue a dour preliminary quarterly report. The stock fell to 30-7/8 on June 4 after having traded at the $37-a-share range just a week earlier. But the stock stabilized when no such announcement was made.

Kumar explained that the fundamentals of the PC environment don't support the bullish enthusiasm fueling stock prices. "We have been waiting for a correction in the sector, and the time is right for that to happen."

He added that the market for personal computers grew 25 percent in 1996, but growth is expected to slow to only 15 percent this year. "There is oversupply across the board and a lot of earnings numbers will have to get readjusted. This is not unique to Gateway."

"Gateway is not losing market share, but the market is slowing down," Kumar said.

The company said operating expenses are higher than expected as they jumped ahead of anticipated sales. Those sales are expected to materialize in the latter part of the year.

Gateway's announcement goes against the positive comments made yesterday by Dell Computer (DELL) vice chairman Mort Topfer. He said Dell's momentum remains strong and the company is "very pleased" with the current quarter and its position in the direct PC business.

Reuters contributed to this report.