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PCs Sales Are on the Move

By Megan Graham-Hackett Market-researcher IDC reported last week that global PC shipments were strong in the second quarter of 2004, with the Framingham, Mass., outfit pointing to a 15.5% year-over-year increase, to 39.7 million units. However, while IDC says the data came in better than expected relative to its own projection, the figure was just below our 16% unit-growth forecast. In fact, second-quarter global PC unit shipments fell 3.6% from the first quarter. And the year-over-year growth rate of 15.5% for the second quarter slowed from the 16.5% rate in the first quarter, according to IDC.

The sequential drop in second-quarter vs. first-quarter PC sales was not unusual, given historical trends. For example, in 1998, PC units sold fell 2.2% in the second quarter, vs. the first quarter. And in 2000 and 2001, second-quarter global PC units fell sequentially by 1.5% and 2.6%, respectively, according to IDC.

Strong European demand was a big driver of second-quarter PC shipments, aided by strong promotional activity, according to IDC. However, recent anecdotal evidence from several tech companies shows some delayed purchases by the U.S. federal government. We will closely monitor demand from this important segment.

LOOKING TO CHRISTMAS. Regarding business PC purchases, demand exhibited signs of life during the second quarter, but it wasn't an overwhelming PC upgrade cycle, in our opinion. Given typical seasonal trends in corporate IT budget cycles, we would expect the bulk of this market's buying to occur in the fourth quarter.

Market-share winners in the second quarter (based on IDC's global-shipment numbers) among the top five vendors were Dell (DELL

; recent price: $35), which gained 110 basis points from a year ago to put it in the top spot. IBM (IBM

; $86), which advanced 20 basis points, landed the third-largest share, followed by Fujitsu Siemens, whose share rose 10 basis points, and Acer, which gained 40 basis points. Hewlett-Packard (HPQ

; $20) kept its market share even year-over-year and held the No. 2 spot for the quarter.

We haven't revised our global PC shipment forecast of an 11% gain for 2004, but we did raise our PC forecast slightly for the third quarter and fourth quarter to make up for the modest second-quarter shortfall (vs. our model). We are now looking for a roughly 5% increase in third-quarter shipments from the second quarter and a more than 11% rise in the fourth quarter vs. the third quarter.

Our third-quarter forecast is based on the continued gradual recovery of the U.S. economy, as well as continued strength in the global economy and a favorable back-to-school demand environment. Our fourth-quarter PC sales forecast largely depends on a seasonally normal demand trend unfolding during the Christmas selling period.

STOCKS TO WATCH. Our third-quarter projection for a sequential 5% rise is within the range of past seasonal trends, as is our 11% sequential growth forecast for the fourth quarter. Although our expectations represent the low end of the range for PC trends from 1994 through 2003, we believe this is reasonable, given the strength of first-quarter PC shipments (which created a higher base for sequential comparisons), as well as the relative maturity of PCs compared with 10 years ago and the gradual economic recovery forecast. S&P chief economist David Wyss is currently forecasting real gross domestic product growth of 4.7% in the third quarter and 4.8% in the fourth.

Given the moderate global PC unit growth we forecast, and with the caveat that the recent demand has been driven by aggressive pricing, we have remained neutral on the computer-hardware group. However, we are positive about the second half of the year regarding overall hardware-related demand and view several names as attractive. We have a buy recommendation on IBM and an accumulate opinion on Dell, Hewlett-Packard, and Lexmark International (LXK

; $86). Our recommendations reflect the favorable industry fundamentals we project for the second half of 2004, as well as our price-to-sales and discounted-cash-flow analyses.

Note: Megan Graham-Hackett has no stock ownership or financial interest in any of the companies in her coverage area. She's a registered representative of Standard & Poor's Securities, Inc. (SPSI). Affiliates of SPSI received non-investment banking compensation from Dell and Hewlett-Packard during the past 12 months. Price charts and required disclosures for all STARS-ranked companies can be found at Graham-Hackett follows computer-hardware stocks for Standard & Poor's Equity Research

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