Conflicting Calls On PC Sector: Sell Dell, Buy Gateway

Includes: DELL, GTW
by: Eric Savitz

There were a pair of conflicting calls Friday on the personal computer sector.

J.P. Morgan’s Bill Shope dropped his rating on Dell (NASDAQ:DELL) to Underweight from Neutral. He sees a tough 2007 ahead for the company, including disappointing gross margins. Shope thinks the company’s enterprise business could come under pressure from increasing competition, a weak position in blade servers and “industry growth compression” from server virtualization software. He also thinks Dell will see little benefit from the rollout of Microsoft's (NASDAQ:MSFT) Windows Vista in 2007 - the company is focused on corporate buyers, who aren’t likely to fully embrace the new software until 2008 or later. Meanwhile, he says consumer buying is not likely to be any more than seasonal in the first half of the year.

Shope cut his estimates on the company to $1.16 a share from $1.17 for this year, and to $1.29 a share from $1.34 for next year - and he asserts that the stock’s 22% premium to the S&P 500 on a P/E basis “will erode in coming quarters.”

Dell shares today fell 8 cents to $26.16.

DELL 1-yr chart

Meanwhile, Matthew Kather, hardware analyst at W.R. Hambrecht, started coverage of Gateway (GTW) Friday with a buy rating. Gateway is still around? Well, yes, it is, to answer my own question. He sees the stock as a “high beta Vista play,” and a turnaround story. He notes that it remains the #3 PC vendor in the U.S.

“Gateway has a new CEO and is in the midst of turning around the company to achieve a more sustainable operating model,” Kather writes. “If management can improve operating margins to a sustained and normalized level of 2%-3% over time, GTW shares have upside.”

Kather set a price target on the stock of $2.70; the stock rose 6 cents Friday to $2.01.

GTW 1-yr chart

Just to keep things in perspective: in November 1999, Gateway shares peaked at $81.50.