Merrill Lynch & Co analysts expect EMC, Sun Microsystems, Lexmark International and possibly Network Appliances and Unisys to show better than expected earnings in the third quarter reporting season which begins this week. In Merrill’s view, internet infrastructure and information appliance server stocks are good investments. The infrastructure is converging while the devices diverge, so profits are moving above and below the PC. IBM, Hewlett-Packard and Xerox should meet expectations, but its feeling is that all three are revenue challenged and that they are going to find it difficult to keep growth levels high compared with competitors. The brokerage wonders how many vendors are going to be tempted to blame any guidance they give on potential under-performance on Y2K issues or the earthquake in Taiwan, and how many that do will be telling the truth. HP has already said that Taiwan will negatively impact its quarter.
With Y2K spending hurdles largely cleared now, the enterprise software sector can look forward to increased opportunity from e- commerce and CRM markets, Merrill thinks. After some stocks exploded in the spring, what Merrill calls an e-commerce tailwind should propel strong revenue growth Ariba, BMC Software, CyberSource, Mercury Interactive, Microsoft, MicroStrategy and Pivotal. It expects BMC, Mercury Interactive and MicroStrategy to beat expectations.
In the internet sector the brokerage believes the business-to- consumer market has matured to the point where it expects it will take three, four or even five years for the number of potential consumers to double again. It’s been doubling every 12 months for the last few years. Merrill fancies Yahoo, AOL, Amazon, Lycos, Etoys and Ebid to report better than expected results.
In the semiconductor market the brokerage expects the effects of the Taiwan earthquake to be made up within a quarter and believes any resulting downtick in stock should be viewed as a buying opportunity. The semiconductor industry is at the beginning of a multi-year upturn characterized by supply side constraint, following five years in the dumpster.
