More Good News Needed on PCs

Sales are up, but discounting has a lot to do with it -- and beating last year's dismal numbers isn't all that much of an achievement

By Megan Graham-Hackett

PC sales figures for second-quarter 2003 are in. According to data recently released by International Data Corp. (IDC), a market-research firm based in Framingham, Mass., worldwide unit shipments of personal computers rose 7.6% year-over-year. While this was an improvement from the first quarter's 2.1% year-over-year rise, that low number was easy to beat.

Looking at quarter-to-quarter growth -- a critical metric for the industry -- second-quarter PC shipments in 2002 were down 8.9% from the first quarter, according to IDC's data. This was sharper than the typical seasonal decline. In fact, from 1994 to 1998 (this period is used by many analysts to forecast PC growth rather than the boom years between 1998 and 2000), IDC data show PC shipments were up 0.7% (quarter-to-quarter) on average, and in only one year, 1998, they actually declined sequentially.

Dell (DELL ) remained the No. 1 PC seller. It saw unit volume growth of nearly 29% in the second quarter -- Dell's highest since first-quarter 2001 -- giving nice support to our revenue growth forecast of 15%. IDC cited strong international sales as a key driver of Dell's unit shipments.


  However, we at Standard & Poor's note that Dell's U.S. PC shipments also rose a healthy 25.6% in the second quarter, giving it a market share of 31.5%, a healthy lead over the next largest competitor, Hewlett-Packard (HPQ ), which has a 19.1% share.

No. 2 HP's year-over-year worldwide PC shipments rose 13.3% in the second quarter, an improvement over the prior quarter's 5.7% decline (both year-ago figures were adjusted to include Compaq Computer's PC shipments, since HP acquired Compaq in May, 2002).

HP garnered 16.2% of the worldwide market in the second quarter, up from 15.8% in the prior quarter and 15.4% a year ago, but down from 17.1% recorded in 2002's first quarter. IDC cited strength in consumer sales due to aggressive pricing and some pickup in the commercial segment.


  IBM's (IBM ) worldwide PC unit shipments rose 11.9% year-over-year, above our forecast. It landed in the No. 3 spot with 6.6% of the market for the second quarter, compared with 6.3% a year ago and 5.4% in 2003's first quarter. IBM benefited from growth in its notebook line and higher demand in Europe and the Asia-Pacific region.

On a regional basis, U.S. PC shipments grew 8.1% year-over-year, while shipments in Europe, the Middle East, and Africa jumped 9.8%, as demand picked up amid aggressive pricing and a continued shift toward notebooks. In the U.S., commercial demand showed some signs of growth but less so than in the consumer market and public sector, according to IDC. In the Asia-Pacific region, despite concerns that SARS (sudden acute respiratory syndrome) would choke off PC demand, unit shipments rose a healthy 12.2% year-over-year.

The third quarter will be an important checkpoint for the health of PC demand for the rest of the year, in our opinion. That period includes the back-to-school season, which has always been difficult to predict. Promotions for PCs are now running high, with many manufacturers going all out with rebates and advertising. We expect the market to get better insight on the pace of actual PC demand from the Dell and HP earnings conference calls over the next two weeks.


  We at S&P are forecasting 3.3% growth in the third quarter from the second quarter for PC unit shipments worldwide, and we continue to believe that unit shipments for the year could come in around 5% higher. This forecast would imply a nearly 19% sequential improvement in PC shipments worldwide in the fourth quarter, which is similar to historical trends.

However, with recent economic forecasts being revised upward, we admit that our PC forecast may prove conservative. In addition, we acknowledge that market-research firms such as IDC are sounding more optimistic on evidence of an infrastructure upgrade cycle that could occur in 2003's second half.

Still, we note that evidence of a sustainable upturn in corporate-demand remains in question. Plus, the recent PC demand has been supported by aggressive price cuts. Against that backdrop, we at S&P are now neutral on the PC category. We have a hold recommendation on both Dell and HP shares for this reason, but we do acknowledge that Dell has taken market share as the low-cost producer. While we have a buy ranking on IBM, this investment recommendation is based on Big Blue's competitive advantages in services and software, not as a play on the PC market.

Analyst Graham-Hackett follows computer hardware stocks for Standard & Poor's

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