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Merrill cautious on Dell
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January 4, 2000: 2:00 p.m. ET
Computer maker’s 4Q could be marred by high component costs, says analyst
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NEW YORK (CNNfn) - Dell Computer Corp. is having difficulty managing its business amid high component costs, which could weigh on the company’s fiscal fourth-quarter operating results, according to a Wall Street analyst’s report.
In a research note to clients on Tuesday, Merrill Lynch analyst Steve Fortuna pointed out that shares of Dell, which were off 3 at 47-7/8 in heavy-volume trading Tuesday afternoon, have risen over the past couple weeks "for no apparent reason” and that the recent spike "should not be construed as meaning Q4 is without risk.”
Dell shares, which ended at 50-7/8 on Monday, are still up sharply from their closing price of 41-3/4 on Dec. 13.
Although he also pointed out some positives for Dell’s fourth quarter, including a decline in memory prices and better availability of flat-panel displays, Fortuna said that the quarter "rests on how well management can fine tune its pricing so as to rebuild margins without materially impacting future competitiveness.”
In November, Dell reported a third-quarter profit of $483 million, or 18 cents per share, which was in line with Wall Street’s expectations. However, executives said that component pricing difficulties, which they said took a bite out of gross margins, appeared to be subsiding.
Executives at Dell in Round Rock, Texas, could not immediately be reached for comment on the current component-pricing environment.
Merrill’s Fortuna is forecasting sales of $7.12 billion, up 37.7 percent from last year, a gross margin of 21 percent, up 80 basis points sequentially, and a profit of 20 cents per share, up from 15 cents per share last year. First Call’s analysts’ consensus estimate calls for Dell to earn 21 cents per share during the quarter, which ends later this month.
As Fortuna sees it, the company has two options. The first is to be less aggressive on PC pricing in order to increase profits, or to follow its normal pricing policy, which would enable the company to maintain its competitive position but would likely prevent it from meeting Wall Street’s estimates, he said.
"We believe Dell will try to finesse a balanced solution to the problem,” Fortuna wrote in the research note. "If the company were to miss the fourth quarter, it most likely would be due to lower gross margins rather than a top-line problem.”
Other computer makers also took a dive on Tuesday, amid a broad sell-off of tech stocks across the board.
Shares of Compaq (CPQ) slid 7.2 percent, shedding 2-1/4 to 28-3/4; Gateway (GTW) slipped 5.8 percent, trading 4-1/16 lower at 65-1/2. Hewlett-Packard (HWP) fell 6-9/16 to 110-7/8, a 5.6 percent decline; and shares of Apple Computer (APPL) lost 5-15/16, trading 5.3 percent lower at 106. 
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