NEW YORK (CNN/Money) -
When high-tech heavyweights including Intel and Microsoft report their third-quarter earnings this week, Wall Street's focus will be more on the business forecasts they provide for the coming months and the critical holiday selling season.
Weak holiday sales, a scenario expected by many industry executives and analysts, would likely mean continued pressure on corporate profits across the industry. On the other hand, a relatively strong holiday season could mark the turning point at which the sector begins its return to solid earnings growth.
"If we have a normal Christmas, which I'm expecting, I think that could set us up for an inventory replenishment cycle next year," said Bill Fries, manager of the Thornburg Value Fund.
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| | Company | | Reporting | | Estimate* | | IBM | Wednesday | 0.96 | | Microsoft | Thursday | 0.43 | | Intel | Tuesday | 0.13 | | AMD | Wednesday | -0.67 | | Novellus | Tuesday | 0.09 | | Sun | Thursday | -0.04 | | EMC | Wednesday | -0.02 | | Gateway | Thursday | -0.15 | | Apple | Wednesday | 0.02 | | Nortel | Thursday | -0.11 |
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"At that point, I think corporate chieftains would maybe get enough confidence in their business to start spending money again," Fries said. "And that could make the latter half of 2003 a pretty decent place to be."
Third-quarter expectations have come down significantly over the past three months, as hopes for a second-half recovery in the sector have been dashed by continued economic sluggishness and weak information technology (IT) spending by large corporations.
At last count, Wall Street generally was expecting companies in the Standard & Poor's technology sector to log a 27 percent improvement in earnings over the year-ago period, according to surveys conducted by First Call, a research firm that tracks corporate earnings.
"You might think that sounds pretty good, but we're comparing to a very depressed base a year ago," said First Call research director Chuck Hill. During last year's third quarter, the nation was in the depths of a recession, with technology outfits among the hardest hit.
And the outlook for the third quarter has deteriorated substantially. On July 1, the forecast for year-over-year earnings growth in the tech sector was nearer 81 percent.
For the fourth quarter, there has been a similar pattern. Currently, the Street is eyeing tech-sector earnings growth of 26 percent. That's down from a forecast for growth of 54 percent on July 1.
Worries about weak consumer demand for technology products such as personal computers and cell phones during the holidays have led to the lowered fourth-quarter view. Several chipmakers, including Intel, Advanced Micro Devices and National Semiconductor, recently have suggested that holiday sales levels are likely to be lower than previously thought.
The general thinking is that a recovery in tech earnings will happen sometime next year, probably in the second half. But U.S. consumer spending, which accounts for about two-thirds of the nation's economy, is the wild card.
"If the consumer doesn't hang in there and we have a double dip in earnings and the economy and fall back into a recession again, who knows what the pattern is going to be?" Hill said.
Still, tech stock prices have fallen sharply, with the tech-laden Nasdaq composite index recently reaching a six-year low. And that has some investors like Fries taking a closer look.
"I'm not feeling good enough that I've stepped up and spent any money on hard-goods technology, but I'm certainly paying attention to what's going on," Fries said.
For the time being, Fries said he is looking at potential opportunities in software and services. The semiconductor capital-equipment industry also is beginning to look appealing, but prices are still likely to come down even from their currently depressed levels, Fries said.
Here come the earnings
Because it is the largest supplier of computer hardware and services, IBM (IBM: Research, Estimates) is considered an industry bellwether. Its third-quarter report, due out after Wednesday's close, will be one of the most closely watched.
The consensus estimate of Wall Street analysts is for a profit of 96 cents a share, which would mark a slight improvement over the 90 cents logged a year ago. IBM's revenue is expected to come in at $19.7 billion, down from $20.4 billion a year ago.
IBM's stock has come under pressure recently after EDS, the No. 2 computer services company, said it missed its third-quarter financial targets by a wide margin. But IBM shares strengthened Friday after Lehman Brother raised its rating on them to "overweight" from "equal weight." The firm said recent concerns about IBM's business have been overdone and suggested that the company is on track to hit its third-quarter financial targets.
Sun Microsystems (SUNW: Research, Estimates), a top supplier of UNIX servers, reports its third-quarter results on Thursday. The expectation there is for a loss of 4 cents per share, a penny narrower than its loss in the year-ago quarter. Sun's revenue is expected to come in at roughly $2.9 billion, which would be flat with a year ago.
“ I'm not feeling good enough that I've stepped up and spent any money on hard-goods technology, but I'm certainly paying attention to what's going on. ”
Bill Fries
Thornburg Investment Management
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Also on the computer hardware front, PC maker Gateway (GTW: Research, Estimates) -- which recently embarked on a strategy of winning customers with low prices at the cost of corporate profits -- is set to reveal its results Thursday. Wall Street is expecting to see a loss of 15 cents per share on revenue of about $1.1 billion. That compares with a loss of 17 cents per share on $1.4 billion in sales last year.
Apple Computer (AAPL: Research, Estimates) is due out with its latest report on Wednesday. Most analysts expect Apple to show a sharp decline in earnings. The consensus estimate is for a profit of 2 cents per share, down from 18 cents a year ago. Revenue is expected to remain flat at $4.5 billion.
Microsoft (MSFT: Research, Estimates), the world's largest supplier of computer software, is due out with its third-quarter results after Thursday's close. It is expected to log a profit of 43 cents per share, flat with the year-ago period. Revenue is expected to show an increase to $7.1 billion from $6.1 billion last year.
Chipmakers and the suppliers of the capital equipment used to manufacture chips have been struggling to boost profits amid flagging demand for computer hardware and other electronics.
Intel (INTC: Research, Estimates), the world's largest chipmaker, is due out with its third-quarter report Tuesday.
Saying microprocessor sales have been weaker than previously expected, Intel early last month narrowed its third-quarter revenue estimate, saying it expects its top line to range between $6.3 billion and $6.7 billion. Previously, the company had been targeting a range between $6.3 billion and $6.9 billion. Last year, the company reported third-quarter revenue of $6.5 billion.
Analysts generally are expecting Intel to log a profit of 13 cents per share, compared with 10 cents per share last year.
Advanced Micro Devices (AMD: Research, Estimates), which ranks a distant second to Intel in PC processor and flash memory sales, reports its third-quarter results Wednesday. Earlier this month, AMD said its third-quarter sales were roughly $500 million, more than $100 million below recent expectations. As for its bottom line, the company, which blamed the shortfall on continued weakness in demand for PCs, said it would log "a substantial operating loss for the quarter." Wall Street expects it to be roughly 67 cents per share.
Novellus Systems (NVLS: Research, Estimates), a top supplier of chip-making equipment, reports Tuesday as well. Analysts generally are expecting to see a profit of 9 cents per share, down from 24 cents per share last year. Revenue is expected to come in at $233.1 million, down from $303.7 million last year.
Telecom-equipment makers have been among the hardest hit in the tech sector as service providers, having overbuilt their network infrastructures during the dot.com boom of the late 1990s, have substantially scaled back their spending.
Nortel Networks (NT: Research, Estimates), the second-largest supplier of telecom equipment in North America, is among those on this week's earnings calendar, due out with its latest report after Thursday's close.
Late last month, Nortel warned investors that it had missed its third-quarter revenue targets. At the same time, the Toronto-based company announced plans for a reverse stock split to lift the price of its flagging shares.
At last count, Wall Street analysts' consensus estimate was for Nortel to log a loss, excluding charges, of 11 cents per share on revenue of roughly $2.4 billion. During last year's third quarter, Nortel reported a loss of 27 cents per share on $3.7 billion in sales.
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