Wall Street Beat: Tech earnings help continue rally in IT shares

Cisco, Lenovo, and Acer help boost investor sentiment

Tech stocks have been climbing recently as key vendors such as Cisco and Lenovo report positive quarterly earnings and the U.S. economy offers glimpses of good news.

So far this year, shares in IT companies rose steadily until April and then tumbled on economic uncertainty and weak sales in PC and consumer electronics markets. However, though computer stocks on the Nasdaq have not yet recovered to where they were at the beginning of the second quarter, they are nevertheless 21.39 percent higher in aggregate than they were at the beginning of the year. Tech, media and telecom stocks on the New York Stock Exchange are up 10.07 percent for the year.

The biggest boost for the IT sector this week was Cisco's quarterly report Wednesday, which showed that for the three months ending July 12, sales rose year over year by 4 percent to hit US$11.7 billion, while net income rose 56 percent to $1.9 billion.

For the current quarter, Cisco forecast year-over-year revenue growth of between 2 percent and 4 percent, and earnings per share growth of 45 percent to 47 percent. That guidance was "a cautiously upbeat forecast, in contrast with the company's more pessimistic outlook three months ago," noted a research note from Canaccord Genuity.

Cisco officials were hopeful but cautious during the company's earnings call with analysts.

"With the exception of Federal government, we saw positive growth and/or uptrend especially in the second half of the quarter," said CEO John Chambers, according to a transcript of the company's earnings call from Seeking Alpha. "Now I want to say, it is way too early to call this a trend, but if this were to continue through Q1, this would be a solid indicator of potential future market improvement in the U.S."

Though not traded on major U.S. exchanges, Lenovo and Acer had good news for the hardware market, which has been in dire need of a boost this year.

Chinese PC maker Lenovo said on Thursday that profit for the quarter ended June 30 grew by 30 percent year-over-year to $141 million, while revenue grew 35 percent to $8 billion. The company has surpassed Dell to become the number two PC maker in the world and is on track at its current growth rate to surpass Hewlett-Packard next year. At the end of the second quarter, Lenovo had a 14.9 percent share of the units shipped in the PC market, while Hewlett-Packard had a 15.5 percent share, according to research firm IDC.

On its part, Taiwanese PC maker Acer on Friday said that for the quarter ended on June 30, profit rose 100 percent year over year to reach NT$56 million (US$1.87 million) while sales increased a healthy 8.3 percent to NT$110.6 billion.

Acer also issued a note of caution, however, as CEO J.T. Wang said during an earnings call that revenue will remain flat as the company transitions toward launching Windows 8 devices in October. Wang did not sound overly optimistic about the new release of Windows, saying, "We are still waiting for the signal of the consumers' enthusiasm."

Despite the various words of caution from IT leaders, tech stocks continued their recent upward trend this week, rising Friday afternoon by 5.66 points on the Nasdaq Computer Stock Index to 1679.30. Part of the reason for the rise in tech shares is general economic sentiment, which is boosting all major U.S. stock indexes -- the Dow Jones Industrial Average, for example, edged up 9.67 points Friday afternoon to 13259.59, continuing a general upward trend. The S&P 500 index was closing in on a high for the year.

Positive signs in the U.S. economy revealed this week included a Federal Reserve report that industrial production increased last month, with a rise in manufacturing of computers, cars and planes. The Bureau of Labor Statistics also this week said consumer prices have held steady in June and July, showing that inflation is in check. On Thursday, the Commerce Department issued a report that building permits rose to more than 800,00 in July, the biggest rise since 2008.

But a pall still hangs over Europe, where several countries are saddled with a huge sovereign debt load. During the second quarter Italy and Spain, the third and fourth largest economies in the euro zone, experienced a decline in gross domestic product of 0.7 percent and 0.4 percent, respectively, according to a report this week from Paragon Report. Of the 17 countries in the euro zone, six are currently in a recession -- Greece, Spain, Italy, Cyprus, Malta and Portugal, the report noted.

Earnings reports from HP and Dell next week could reinforce the generally positive sentiment emanating from tech recently, or once again stir up concerns about the uncertain global economy.

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Marc Ferranti

IDG News Service
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