Downtime in profits for computermakers may offer bargains

Remember when Time magazine's ``Man of the Year'' was a computer? Well, so far in 1985, computer companies are taking a good shot at ``Dog of the Year'' honors. Sure, the techies had a nice run-up in stock prices during the January bonanza. In fact, these once-forgotten darlings led the charge. But as noted in the adjacent article, a long list of computermakers are taking a silicon earnings slide.

Swoosh. Wang Laboratories, after 10 years of consistent profits, may be looking at an earnings drop of 30 percent or more by year-end.

Swoosh. IBM first-quarter earnings tumble 18 percent compared with last year. And Big Blue records its first macro failure in micros: the PCjr.

Swoosh. Texas Instruments' net income dives 89 percent from last year at this time.

So who would dare own computer stocks when earnings are slipping so precipitously?

John D. Connolly, for one. This portfolio strategist for Dean Witter Reynolds sees this computer downtime as an opportunity to access some bargains. But don't expect results tomorrow, he says. Or the day after. ``This looks like a second-half group.''

``Wang, Digital Equipment, Sperry, Prime, have all introduced new products,'' Mr. Connolly points out. It will be a while before sales of these new machines filter down to the bottom line.

Of course, much will also depend on the state of the economy later this year. Signs of a slowing economy, coupled with drawn-out federal budget haggling, have economists and executives concerned. Chrysler chairman Lee A. Iacocca said last week, ``If [Washington] can't solve the deficit and trade problem, we have to get ready for some kind of recession.''

Connolly agrees a budget cut is crucial and is counting on $40 billion to $50 billion getting lopped off. If so, he predicts ``moderate growth,'' with a rebound coming later in the year. ``You'll see a couple of soft but not negative quarters.''

The poor computer earnings now are a result of competition and the uncertain picture that corporate customers faced late last year when they were drawing up their 1985 budgets. Says Connolly, ``Capital spending has slowed down from a red-hot 22 percent growth last year to just an 8 percent rise this year.''

Slower earnings are a healthy development, resulting in a beneficial tempering of expectations for computer issues, says Carol Morrow, at Piper, Jaffray & Hopwood in Minneapolis. ``A lot of companies will grow 15 to 20 percent annually. That's not the 40 to 50 percent they're accustomed to, but it's not bad for any business.''

Her opinion is seconded in a recent Dean Witter technology report: ``Projected earnings growth rates for technology companies are frequently too high and should be used with care in the valuation process.''

Nevertheless, Connolly says, ``there appears to be much more value in computer stocks now than in most other industries. It is one of the most attractive segments.'' IBM, Data General, Sperry, Prime Computer, and SCI Systems are on the Dean Witter buy or buy/hold list.

While computer stocks weren't exactly the hottest issues on the market last week, the Dow Jones industrials did perk up. The Dow posted a 8.62-point gain for the week, closing at 1,275.18.

Major oil stocks -- after their own turn in the doghouse -- were the big gainers. Atlantic Richfield jumped almost 4 points, Amerada Hess Corporation rose 3 points, Amoco Corporation (formerly Standard Oil of Indiana) picked up a couple. Gains of a point or more across the board were not uncommon.

The oil stock buying came despite mixed earnings reports coming out all week. Apparently, the buying was spurred by gushing recommendations from a few analysts at the larger brokerage houses.

The reasons for the spurt?

``Spot oil prices firmed up. It's more or less a quarterly play'' by the institutions, says Ms. Morrow at Piper, Jaffray.

Institutions had pared back their holdings. Now, as it becomes more widely recognized that oil stocks are performing well, portfolio managers are raising their stakes. ``Its a rotational move,'' explains Connolly at Dean Witter. ``Energy was underweighted. Once the group moves, though, managers jump in to protect themselves.''

One other factor prompted the rash of ``buy'' recommendations, according to Sanford Margoshes, an oil analyst at Shearson Lehman Brothers. ``In the first-quarter earnings reports, management highlighted improving refinery marketing margins.'' But he points out that the first-quarter earnings are generally poorer this year than last. He grants that margins are improving. ``But there is too much euphoria in extrapolating this trend,'' he says.

And crude prices are headed downward, Mr. Margoshes says. Oil stocks tend to follow spot oil prices. This winter, prices climbed as temperatures plunged in Europe and the Soviet Union. Also adding to the price rise was the coal strike in Britain and oil production snafus in the Soviet Union. All this has passed. Margoshes says spot oil prices are due for a sharp reversal.

``Anyone buying [oil stocks] now is buying at a top. I would say this is an excellent opportunity to lighten up,'' he opines. He advises interested oils buyers to hold off for three to six months.

Investors were indeed lightening up on one particular oil stock last week. But spot oil prices had nothing to do with the decision. Unocal stock dropped several points as doubts arose over the soundness of T. Boone Pickens's takeover bid.

Unocal made an offer last week to buy back 29 percent of its shares for $72 in debt securities. Some analysts expected Mr. Pickens to counter by raising his $54-a-share offer, but instead he and his partners decided to sign up for the Unocal offer ``to protect our investment.'' As of this writing, Pickens says he remains committed to his takeover plans.

A preliminary court ruling cast another shadow over the Pickens bid. The judge supported Unocal's contention that Mesa Partners II violated federal securities law when it said it was buying Unocal for investment purposes only. As Unocal stock dropped to the $46-a-share range, Dean Witter's oil analyst, Eugene L. Nowak, among others, hung out the ``sell'' sign. Chart: Interest rates. *Yields; Source: Bank of Boston.

Percent Prime rate 10.50 Discount rate 8.00 Federal funds 7.87 3-Mo. Treasury bills 7.79 6-Mo. Treasury bills 8.02 7-Yr. Treasury notes 11.22* 30-Yr. Treasury bonds 11.41*

You've read  of  free articles. Subscribe to continue.
QR Code to Downtime in profits for computermakers may offer bargains
Read this article in
QR Code to Subscription page
Start your subscription today