Dell in Trouble?Friday January 14, 12:12 pm Eastern Time
RESEARCH ALERT - Merrill sees Dell Q4 in danger
NEW YORK, Jan 14 (Reuters) - With two weeks left in its fourth quarter, Dell Computer Corp. (NasdaqNM:DELL - news) could still fail to meet earnings expectations as higher component costs cut gross margins on products, Merrill Lynch said on Friday.
In a research note to Merrill clients, analyst Steve Fortuna revived recent concerns that Dell could be in danger of an earnings shortfall -- a view that remains hotly disputed on Wall Street, with some analysts rallying to Dell's defense.
``The fact that Dell has not yet pre-announced to us does not suggest that the quarter is any safer than it was before,'' Fortuna said.
However, shares of Dell gained 2-1/4 to 45-3/8 amid a wave of enthusiasm that sent PC chipmaker Intel's shares up nearly 14 points to 105 after its better-than-expected fourth quarter earnings report Thursday and its solid year 2000 outlook.
Still, Fortuna argued that despite recent drops in computer memory price, ``Dell continues to face an execution challenge in Q4 (fourth quarter) due to generally higher component costs across the board.''
He said that Dell was unlikely to compromise its competitive position by becoming less aggressive on PC pricing. ``As a result, if Dell were to miss the quarter, we believe it will be primarily due to lower gross margins,'' he wrote.
If Dell was to pre-announce an earnings shortfall, Fortuna speculated that the announcement would come in the third or the fourth week of January and not in the days preceding the February 10 earnings release.
Such a scenario would be a replay in key respects of the company's third quarter warning that it expected profit margins to fall due to a spike in computer memory chip prices at the time. That warning was issued by the company on Oct. 18.
Dell went on to meet Wall Street's lowered expectations following the shortfall announcement in its third quarter report issued November 11.
Fortuna said he estimated Dell's fourth quarter sales would grow 37 percent year over year to $7.1 billion, on the soft side of Wall Street expectations and below historic rates of growth. He projected earnings per share of 20 cents, compared with the consensus Wall Street view of 21 cents.