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Friday, August 25, 2006

Tech Beat

By William Trent, CFA of Stock Market Beat

ValueLine profiled the Computer Software and Services group, and says:

The Computer Software & Services Industry should continue to perform well, both this year and through the later years of this decade. The U.S. economy is showing some signs of slowing, and business spending on equipment and software did weaken in the June quarter, but we think both business and consumer spending on computing gear and software will pick up in the second half of the year, and continue at a decent pace in 2007 and out to 2009-2011, leading to good revenue and earnings gains for this group. Indeed, investors should be able to find a number of stocks in this sector that will be of interest, since many of these equities are timely for the year ahead, and even more of them have above-average 3- to 5-year appreciation potential.

Meanwhile, the durable goods data looks pretty good for tech hardware. For computers especially, shipments, orders and unfilled orders accelerated sharply.

When averaged against a slowdown in communications equipment, this could be good news for the likes of Dell and acts as some confirmation of our theory that the strength in Microsoft’s deferred revenue could lead to better-than-expected growth in computer sales next year. The fact that Dell rallied from its preannouncement lows and stayed above them despite the battery recall and a disappointing conference call indicates that the bottom may be in place.

Dell may be further helped by semiconductor pricing. As we have discussed before, we think the semiconductor industry is about to have way too much capacity. That should result in lower prices, which in turn would help Dell’s margins (along with Hewlett Packard’s.) Applied Materials (AMAT) noted on their conference call that the outlook for next year’s equipment orders hinges on whether semiconductor makers can cut their inventory levels. AMAT shouldn’t hold their breath on this one.

At any rate, recovery can’t come soon enough for many tech players. Leading distributor Tech Data (TECD) saw sales rise 2.7% year/year, with gross margins declining due to problems with their overseas divisions. They said market conditions reflect a competitive environment. Without a significant catalyst to spur new computer purchases, the whole group could quickly return to the doghouse.

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