The parts that go into your PC are getting cheaper. And that's good news for Hewlett-Packard and Dell.
Both companies will report earnings this month with HP on deck August 16. Dell follows up on August 30. What we're likely to hear is that unit sales are up, demand is solid and profit margins are better due to cheap component costs.
In a research note, Chris Whitmore, an analyst with Deutsche Bank, said DRAM prices are down 27 percent on average this quarter compared to the prior one. Hard drive prices were down 3 percent and LCDs are roughly flat quarter to quarter. The big benefit is that Intel and AMD are in a price war, which also lowers parts costs.
These cheaper component costs come as demand appears to be strong, says Whitmore. "We believe PC unit growth will continue accelerating through year-end and expect consensus expectations for PC unit growth to trend towards our +15% estimate," said Whitmore.
HP is expected to report fiscal third quarter earnings of 65 cents a share on revenue of $24 billion. According to Whitmore, HP should benefit from strong consumer sales and lower component costs. Inkjet sales and enterprise revenue are expected to be softer in the quarter.
Regarding the printer business, Whitmore noted that prices will fall. "We expect printer pricing to intensify in the back half of the year, particularly in inkjet, as both Kodak and Lexmark attempt to drive unit growth and ramp their respective installed bases," he said.
Regarding Dell, Whitmore notes that the company should be able to beat his revenue estimate of $14.5 billion when it reports its fiscal second quarter results. Wall Street expects Dell to report earnings of 30 cents a share on revenue of $14.6 billion, according to Thomson Financial. Those estimates don't include the $48.5 million Dell is paying former CEO Kevin Rollins. Dell is expected to show growth in desktop, notebook and server sales. Corporate demand is expected to be strong.
For both HP and Dell (not to mention other PC vendors like Apple) the wild-card is going to be how long these favorable component costs last.
Bank of America Securities analyst Scott Craig noted that Taiwan contract manufacturers have seen recent component shortages of notebook batteries and LCD panels. If these shortages persist, Craig said PC unit shipments may disappoint.
"A shift in the component supply/demand balance, from surplus, which benefited OEMs in the first half of 2007, to shortages, could negatively impact the PC vendors' margins," said Craig.