On Wednesday morning the markets opened lower due to an unexpected rise in the Consumer Price Index (CPI). The overall measure of consumer prices moved up 0.5 percent in April while the markets were anticipating a rise of only 0.4 percent. Late Tuesday Hewlett Packard announced that the company had met the Streetis expectations for earnings, but missed by about ten percent the target for revenues. HP was down more than one dollar in price, dropping about seven percent in morning trading.
The Tech Sector
Traders have responded mostly positively to Applied Materialis upside earnings surprise on Tuesday and the companyis announcement that orders for the current quarter will be up between ten and fifteen percent. Applied Materials is a leading maker of equipment for chipmakers and increases in orders portends news of increasing demand for technology products. The company jumped in price in after hours activity yesterday but opened lower due to concerns that, even with Applied Materialis near-term positive news, the company maintains a cautious view of the market through 2002. Deutsche Bank cut its rating of Applied Materials from a "Strong Buy" to a "Buy" based on the companyis cautious guidance while other firms slightly raised their earnings estimates and reiterated their current ratings.
This morning Merrill Lynch raised its rating on AOL Time Warner to "Near-Term Buy" based on the companyis current stock valuation, not on the prospect of improving market conditions. Much of the bad news has worked its way through the technology sector and analysts are finding several technology firms, AOL Time Warner included, that may be oversold based on current valuations.
The Broader Market
On Monday and Tuesday the markets cheerfully responded to upbeat corporate news and signs of the beginnings of a rebound in the tech sector. On Tuesday investors cheered Wal-Martis jump in quarterly sales and evidence that consumers are continuing to spend despite concerns about sluggish growth in the economy.
By early Wednesday afternoon, traders realized that the core consumer inflation figure of the Consumer Price Index was in line with expectations and investors began to shrug off continued gloom in calendar year 2002 revenues and earnings estimates for the tech sector, and pushed the NASDAQ Composite Index higher in intra-day trading.
However, in late afternoon trading the markets turned south erasing early afternoon gains. The Dow Jones Industrial Average closed at 10,243.68, down 54.46. The S&P 500 moved was down 5.26 at 1.091.00. The NASDAQ Composite Index rose a modest 6.51 to end the day at 1,725.56. AAPL finished Wednesday at $25.28, down $.33.
The markets are continuing to look for leadership in order to sustain a broad-based rally. Blue chips have been a haven for traders as timid investors slowly wade back into other areas of the market. This weekis news has delivered signs of growth in the technology sector, but as in years past new investment in IT infrastructure and computer systems is tied to anticipated gains in productivity. For now productivity continues to grow without new technology spending, but as the recovery matures and business leaders become more confident, IT spending should increase as corporate executives look for ways to maintain productivity growth in order to sustain long-term growth in earnings.
On Tuesday Apple Computer announced that rackmount servers will be available starting in June. Rackmount servers require less space and can be efficiently stacked for multi-server configurations. The high performance/low power consumption design of the G4 processor has created significant demand for an Apple rackmount server in research and education. The product will also be popular with large design and content creation firms.
Appleis rackmount server will not materially challenge the Wintel hardware leaders such as HP-Compaq in the small server market, but it does provide for more complete Mac OS X-based solutions in Appleis traditional markets, it will also cement the inroads Apple has made in the higher education and scientific communities. Large design and content creation firms no longer need to look beyond Apple for server solutions to run front office operations.
While investors wait for Thursdayis results from Dell Computer, many analysts are ready to write the epitaph for Gateway. Seventeen of the nineteen analysts that cover the stock rate it no better than a "hold".
Recently two of the major debt rating agencies further reduced their ratings on the company to well below investment grade. Investments in Gateway are considered speculative at best. Soon after the ratings cuts were announced, Gateway retorted that with over $1 billion in cash, its current debt rating is irrelevant. Gateway is not in the market to borrow money at this time, but its current debt rating evidences the Streetis skeptical view that the company has a real long-term future.
Gatewayis cash position may buy the company time as is seeks to first regain lost market share and then grow earnings. Few believe Gateway can increase sales and make a profit competing on price with PC market leaders HP and Dell.
After Tuesdayis closing bell on Wall Street, HP announced that the company had met the Streetis expectations for the quarter in terms of earnings from operations, but fell short on revenues during its final reporting period prior to the HP-Compaq merger. HP CEO Carly Fiorina does not see a meaningful rebound in corporate IT spending until 2003.
For the quarter revenue was down about ten percent from year earlier levels and the company experienced a dramatic drop in consumer PC sales. Analysts are carefully watching the manner in which the post-merger HP reduces costs in order to sustain earnings. HP is challenged by a soft market for its products and the formidable task of consolidating operations with Compaq following the largest technology merger in history.
The company has pledged to provide more forward-looking estimates and detailed information about the companyis post merger plans during a conference call with analysts scheduled for early June.
HP executives have publicly stated maintaining market share is a top priority as the company seeks to reduce expenses and better align the combined HP and Compaq products lines with the market. Revenues from HPis printer business dropped less than one percent from year earlier levels.
In Wednesday activity:
Apple (AAPL) AAPL finished at $25.28, down $.33.
Gateway (GTW) ended at $5.57, down $.14.
Hewlett Packard (HPQ) ended the day at $19.35, down $1.15.