Credit analyst steps back from tech sector enthusiasm in 2004

By Ronda Fears

Nashville, Jan. 30 - While not entirely reversing a shift last August to recommend an overweight position in the technology sector, CreditSights analyst Frank Lee on Friday expressed a more cautious approach in a report Friday due to mixed signals in the space and a murky view of whether IT spending is rebounding.

"We remain concerned with Sun Microsystems and EDS. Motorola appears to have stabilized but many challenges remain," Lee said in the report.

"We like Texas Instruments and Applied Materials. IBM and Dell continue to dominate. Computer Associates remains volatile but could be rewarding."

In late August, CreditSights had raised its weighting for the tech sector to a market weight from an underweight based on positive trends in the economy and industry data which indicate rising demand for various IT products and services.

"Recent economic data indicated that production, new orders, and fixed investments have shown meaningful improvements. Total industrial capacity utilization remains weak," Lee said in the report.

"At this point, several benchmark names continue to share the spotlight over credit quality concerns - either accounting problems or weak corporate strategy. These issues will play a major part with respect to performance in 2004; either spreads will tighten if these issues are resolved, or widen if investors are not fully satisfied."

The semiconductor sector has been the darling performer over the past few months as demand for chips - in laptops, mobile phones and handheld devices - has driven the fortunes of semi manufacturers higher, he noted.

Notebook computers have been a bright spot, too, he added, but aggressive pricing and competition have offset volume improvements. And, total PC unit demand is strong, but profitability for the major vendors is weak.

"Our more positive view was tempered [in August] by the mixed outlook for the balance of 2003 as cited by the major tech companies at that time. As we are well into the reporting season, results from the major tech companies have been encouraging with various sub-sectors performing much better than anticipated," Lee said.

"Nevertheless, there still appear to be hints of caution in many of the companies' outlook for this year. Most noticeable has been that consumer spending has contributed more to the recent increase as opposed to corporate IT spending, which while improving, has remained somewhat lackluster. Until corporate spending truly rises, the anticipated rise in IT spending for 2004 will be limited."

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