Merrill smashes big name techs
'The Bull' turns bearish on Cisco, IBM, Hewlett-Packard
By Susan Lerner, CBS.MarketWatch.com
Last Update: 4:14 PM ET Dec 20, 2000 NewsWatch
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NEW YORK (CBS.MW) -- Shares of Cisco, IBM and Hewlett-Packard all tumbled to new lows intra-day Wednesday after Merrill Lynch slashed its ratings on the tech leaders, citing slowdowns in information technology (IT) spending.
Cisco led the group on the downside, plunging $5.25, or 13 percent, to finish the day at $36.50 after Merrill analyst Michael Ching dropped his recommendation on the stock to "intermediate-term accumulate" from "intermediate-term buy."
"We believe than an economic slowdown suggested by recent indicators will prompt investors to become increasingly concerned about a deceleration in corporate IT spending in general," Ching told clients, noting that the Enterprise and Small and Medium Business market currently represents about 65 percent of Cisco's revenues.
Ching cited a Merrill survey of more than 50 MIS managers that revealed 58 percent of those managers indicated an IT budget of less than $5 million. A little less than 25 percent expected to spend $5 to $50 million and 18 percent projected spending more than $50 million, according to the study.
Merrill's study, which it dubbed a "Reality Check," should have provided more of a dose of reality to Merrill than anyone else since most of the Street has been expressing concerns about IT spending for quite some time. As recently as Dec. 4, Merrill's global technology strategist Steve Milunovich had told clients that IT spending looked "solid," writing in a research note that a preliminary survey of buying intentions suggested budget growth should be similar to or even a bit faster in 2001.
Ching expects these issues to weigh on Cisco's multiple, at least for the near-term. Longer-term, however, he said Cisco (CSCO: news, msgs) remains one of his favorite picks and reiterated his "long-term buy" rating on the shares.
Blue's blues
But downgrading one "big boy" wasn't enough for Merrill Wednesday.
Big Blue shares also sang the blues, off $4.13, or 4.6 percent, to $86 after analyst Thomas Kraemer slashed his intermediate-term recommendation on IBM (IBM: news, msgs) to "neutral" from "buy."
"We believe that changes in the macro environment, slowing IT spending and very poor visibility may complicate hitting revenue and growth targets in Q2 and the back half of 2001," Kraemer wrote in a research note. "Our Reality Check survey indicates that spending intentions for mainframe decelerate over the next two years."
H-P Hit
Kraemer wasn't finished with the IBM downgrade, however. He also took the ax to another Dow component, Hewlett-Packard (HWP: news, msgs), slashing his intermediate-term rating on the stock to "neutral" from "accumulate."
"A rough estimate from our valuation work suggests a $40 valuation for Hewlett-Packard," Kraemer said. "Given the fundamental risks, slowing IT environment and poor Unix orders, we do not think there is positive risk reward at current levels."
'The Bull' turns bearish on Cisco, IBM, Hewlett-Packard
By Susan Lerner, CBS.MarketWatch.com
Last Update: 4:14 PM ET Dec 20, 2000 NewsWatch
Latest headlines
Get Alerted
NEW YORK (CBS.MW) -- Shares of Cisco, IBM and Hewlett-Packard all tumbled to new lows intra-day Wednesday after Merrill Lynch slashed its ratings on the tech leaders, citing slowdowns in information technology (IT) spending.
Cisco led the group on the downside, plunging $5.25, or 13 percent, to finish the day at $36.50 after Merrill analyst Michael Ching dropped his recommendation on the stock to "intermediate-term accumulate" from "intermediate-term buy."
"We believe than an economic slowdown suggested by recent indicators will prompt investors to become increasingly concerned about a deceleration in corporate IT spending in general," Ching told clients, noting that the Enterprise and Small and Medium Business market currently represents about 65 percent of Cisco's revenues.
Ching cited a Merrill survey of more than 50 MIS managers that revealed 58 percent of those managers indicated an IT budget of less than $5 million. A little less than 25 percent expected to spend $5 to $50 million and 18 percent projected spending more than $50 million, according to the study.
Merrill's study, which it dubbed a "Reality Check," should have provided more of a dose of reality to Merrill than anyone else since most of the Street has been expressing concerns about IT spending for quite some time. As recently as Dec. 4, Merrill's global technology strategist Steve Milunovich had told clients that IT spending looked "solid," writing in a research note that a preliminary survey of buying intentions suggested budget growth should be similar to or even a bit faster in 2001.
Ching expects these issues to weigh on Cisco's multiple, at least for the near-term. Longer-term, however, he said Cisco (CSCO: news, msgs) remains one of his favorite picks and reiterated his "long-term buy" rating on the shares.
Blue's blues
But downgrading one "big boy" wasn't enough for Merrill Wednesday.
Big Blue shares also sang the blues, off $4.13, or 4.6 percent, to $86 after analyst Thomas Kraemer slashed his intermediate-term recommendation on IBM (IBM: news, msgs) to "neutral" from "buy."
"We believe that changes in the macro environment, slowing IT spending and very poor visibility may complicate hitting revenue and growth targets in Q2 and the back half of 2001," Kraemer wrote in a research note. "Our Reality Check survey indicates that spending intentions for mainframe decelerate over the next two years."
H-P Hit
Kraemer wasn't finished with the IBM downgrade, however. He also took the ax to another Dow component, Hewlett-Packard (HWP: news, msgs), slashing his intermediate-term rating on the stock to "neutral" from "accumulate."
"A rough estimate from our valuation work suggests a $40 valuation for Hewlett-Packard," Kraemer said. "Given the fundamental risks, slowing IT environment and poor Unix orders, we do not think there is positive risk reward at current levels."
