Are PCs Losing Power?


By Megan Graham-Hackett Personal computer demand appears to be healthy, based on the latest data from IDC, a market-research firm based in Framingham, Mass. According to IDC, global PC shipments rose 11% year-over-year in the first quarter, to 46.1 million units, with no signs of weak consumer demand or dampening European prospects evident in the data.

U.S. shipment growth of 6.5% wasn't as robust as in recent quarters, but the market was coming off a strong fourth quarter. And despite certain tech companies mentioning some slowing in Europe, shipments remained strong there as well, according to IDC data, led by demand for portables. The Europe, Middle East, and Africa (EMEA) region posted growth of 15.7%, far outpacing PC shipment growth in the U.S.

Among the top five vendors, market-share gainers in the first quarter based on global shipments (according to IDC) included Dell (DELL

; recent price: $35), which gained 40 basis points of share year-over-year, to 18.9%, and remained in the top spot. Fujitsu/Fujitsu Siemens, the No. 4 vendor, gained 10 basis points, to 4.6%, while No. 5 vendor Acer gained 70 basis points, to 4.0%, as both benefited from stronger European demand.

SHIFTING LANDSCAPE. Hewlett-Packard (HPQ

; $20) kept its market share at 15.4%, even from a year ago, and held the No. 2 spot for the quarter. IBM's (IBM

; $76) share fell 40 basis points, to 5.1% -- which was likely related to the pending sale of its PC division to China-based Lenovo Group -- but the company remained the third-largest vendor.

We at Standard & Poor's Equity Research haven't revised our global PC shipment forecast of 8% to 10% growth for 2005. However, it's worth noting that earlier this year IDC modestly lowered its growth forecast to 9.7%, from 10.1%. The industry faces stiffer year-over-year comparisons in the second half of 2005, and U.S. economic data have been uneven so far this year, with higher oil prices potentially curbing consumer demand for PCs as the year progresses. Meanwhile, demand from corporations remains a critical question for the year, and signs to date are still uncertain.

Another variable that we believe may affect 2005's PC unit growth is recent consolidation in the industry. In 2004, Gateway (GTW

; $4) and eMachines joined forces. In the second quarter of 2005, Lenovo is expected to complete the purchase of IBM's PC division. Both of these deals have changed the competitive landscape in the PC industry and are likely to influence PC pricing trends and market-share shifts, in our opinion.

TOP PICKS. In addition, a new CEO at the helm of Hewlett-Packard could alter the company's PC strategy. Given HP's position in the industry, we believe any strategy shift could influence the PC market this year.

Another factor to consider is that 2005 follows a two-year recovery in PC global shipment growth. The growth in PCs in 2004 followed an 11.9% rise in shipments in 2003. That double-digit performance marked a recovery after a two-year downturn that began in 2001, when PC shipments fell 3.9%, according to IDC. In 2002, PC unit shipments rose a modest 1.9%.

Given the moderate global PC unit growth we forecast -- and with the caveat that we believe demand has recently been driven by aggressive pricing -- we remain neutral on the computer-hardware group. However, we're positive about overall hardware-related demand in the second half of the year and view several names as attractive.

PC Makers

Company

S&P STARS Rank

12-month target price

Dell

5

$49

IBM

3

$87

Hewlett-Packard

3

$21

Gateway

3

$6

Apple

3

$46

We have a strong buy recommendation on Dell, and hold recommendations on IBM, Hewlett-Packard, Gateway, and Apple Computer (APPL

; $36). Our recommendations reflect the relatively favorable industry fundamentals we project for the second half of 2005, as well as our price-to-sales and discounted cash flow analyses.

Required Disclosures

In the U.S.

As of Mar. 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

In Europe

As of Mar. 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.

In Asia

As of Mar. 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.

Globally

As of Mar. 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the U.S., research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the U.S., research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.

S&P and/or one of its affiliates has performed services for and received compensation from DELL, IBM and HPQ during the past 12 months.

GTW & AAPL are not customers of S&P or its affiliates.

Disclaimers

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. Analyst Graham-Hackett follows computer hardware stocks for Standard & Poor's Equity Research


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