August 17, 2011 / 11:39 AM / 6 years ago

HP, Dell hammered as tech-spending outlook darkens

<p>Dell computers are displayed at Best Buy in Phoenix, Arizona, February 18, 2010.Joshua Lott</p>

BANGALORE/SAN FRANCISCO (Reuters) - Shares of Hewlett-Packard Co and Dell Inc fell on Wednesday as the outlook for U.S. and European corporate government technology spending dimmed.

Investors had hoped for a rebound in public and enterprise spending on hardware upgrades this year to offset stubborn consumer weakness, but it has yet to fully materialize.

Dell's shares fell 10.6 percent a day after the world's No. 2 PC maker slashed its full-year revenue forecast. Bigger rival HP, due to report results after Thursday's close, slid more than 4 percent to $31.25.

Cisco Systems Inc, which relies heavily on government clients, slid 1.8 percent to $15.71.

"Investors are understandably cautious about whether the environment could now get worse," RBC analyst Amit Daryanani wrote in a client note.

"Like Cisco and other peers, Dell is seeing demand here pressured due to public expenditure reductions which are not expected to abate anytime soon."

On Tuesday, Dell forecast fiscal 2012 revenue growth at 1-5 percent, down from 5-9 percent, and said weak government and corporate spending may not hold up in the face of flagging economic growth.

Wednesday's sell-off came despite Dell reporting better-than-expected margins in the second quarter, as investors focused on the lowered outlook.

RBC lowered its price target to $17 from $20, but maintained its "sector perform" rating on the company's stock.

Gloom and Doom?

HP and Dell, mindful of the low-margin business of cranking out personal computers and hardware, are venturing out of traditional comfort zones into enterprise solutions and services. They are also developing mobile devices like tablets to try and take on the likes of Apple Inc.

But major clients remain key: Dell gets three-fourths of its revenue from sales to large enterprises, while HP gets a little more than half from the same.

Continuing soft sales to consumers have troubled HP, which has a more diversified hardware and services portfolio, over the last several quarters.

In the second quarter, HP cut its profit forecast for the year, saying it needs to invest heavily on hiring and expanding its services division to recover from "missed opportunities" under previous Chief Executive Mark Hurd.

Still, Bank of America Merrill Lynch expects the low investor sentiment on Dell, its cheap valuation and possible gains from an enterprise refresh, will position the shares to outperform in 2011.

The brokerage raised its price target to $18.50 from $18, and maintained its "buy" rating.

Shares of Dell, based in Round Rock, Texas, fell to $14.12 in afternoon trade on Nasdaq.

Editing by Joyjeet Das, Viraj Nair and Richard Chang

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