Earnings Fears Pummel Dell’s Stock, Rattling Market

Concern that Dell Computer will report disappointing financial results next week sent the company’s shares tumbling nearly 12% Friday and contributed to a steep decline in the main Nasdaq stock index.

The impetus for the steady drop was a report from BancBoston Robertson Stephens tech analyst Dan Niles, who reduced his estimate for Dell’s fourth-quarter sales to $5.2 billion from $5.5 billion because of smaller-than-expected unit sales and lower average selling prices for PCs. Niles said Dell’s stock price could fall to $80 “in the near term.”

That report, combined with a comment from a Salomon Smith Barney analyst suggesting Dell’s competitors are making greater-than-expected inroads in Dell’s markets, sent the Round Rock, Texas-based company’s stock sliding $12 to close at $89.88. It was the most active U.S. stock, with 66.4 million shares changing hands.

The decline in Dell, the best-performing stock in the Standard & Poor’s 500 index for the last three years, drove many other computer, software and networking stocks lower Friday. In Nasdaq trading, chip maker Intel fell $6.75 to $126.50, while networking company Cisco Systems lost $5.81 to close at $99.06. Dell rival Compaq Computer dropped $1.81 to $43 on the New York Stock Exchange.

Analysts said there have been signs of slowing sales growth at the No. 1 direct seller of personal computers for some time.

American corporations, Dell’s primary customer base, accelerated computer buying to eradicate the so-called year 2000 bug, and now the market is saturated, said Ashok Kumar, an analyst with Piper Jaffray in Minneapolis. Dell’s growth rate is now hovering around 40%, compared with an average of 56% in the last two years, he said.

“It will continue to grow faster than the overall market, but for people to expect the same [growth rate] as it has recorded on a historical basis is clearly unrealistic,” said Kumar, who rates Dell shares a “buy.”

On Tuesday, Dell is expected to report earnings of 31 cents a share, according to estimates compiled by IBES International. That would be a 55% increase over the split-adjusted earnings of 21 cents a share in the same period last year.

Neither Robertson Stephens nor Salomon reduced their 31-cent estimates for the quarter. But their comments suggested Dell would have a tough time pleasantly surprising Wall Street--which is what many investors count on.

In the last 12 months, Dell’s stock has more than quadrupled to a high earlier this month of $110. With its stock trading at a multiple of just under 70 times projected earnings, Dell was vulnerable to a steep drop due to bad news, said William Conroy, analyst for Sanders Morris Mundy.

“The implication . . . is that the growth story of the company may in fact be slowing,” Conroy said.

Preliminary estimates of 1998 worldwide PC shipments released in January by San Jose market research firm Dataquest show Dell’s market share grew from 5.5% in 1997 to 7.9% last year, with shipments totaling nearly 7.4 million. Dell’s 65% growth easily topped the growth rates of No. 1 Compaq Computer and No. 2 IBM, as well as the 15.3% growth rate for the entire PC industry, according to Dataquest.

Earlier this week, Chief Executive Michael Dell told a conference in New York that although growth in the overall PC market is forecast to slow to 17% from 19% during the next three years, Dell “will continue to grow significantly faster than the industry.”

Bloomberg News was used in compiling this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Steady Climb

Dell Computer has matched or beaten analysts’ consensus earnings per share estimates in the last eight quarters. Dell’s earnings versus expectations:

Second Quarter Earnings estimate: 28 cents

Third Quarter Actual earnings: 27 cents

Source: First Call