Some computer stocks get buy signal

It just doesn't compute.

The computer industry, its trusted mainframes going unwanted and its personal computers selling at cutthroat prices, can't seem to right itself. Some Wall Street analysts predict another 100,000 to 200,000 jobs may be lost.


However, other analysts, while frowning on prospects of big firms such as IBM, see some cause for optimism on the political and economic horizon.

"Election of Bill Clinton to the presidency helps data services firms that do business with the federal government, and also hospital and health care firms," said Stephen McClellan, first vice president with Merrill Lynch & Co. "That's because of an expected expansion of both government and health care coverage."


The concept of corporations "outsourcing" computer services to outside firms to save money and make do with fewer employees will be growing in the 1990s, McClellan predicted. This should provide solid profits for the computer service companies which are most adept at meeting their needs. No miracles are expected for sales of the equipment itself.

"There may be optimism about President-elect Bill Clinton helping the industry through tax credits and other stimulus moves, but the problem is that two-thirds of computer revenues come from overseas," said Stephen Smith, senior vice president with PaineWebber Inc. "Computer demand in Japan, the United Kingdom and Germany is weak and deteriorating." He expects a continued weak mainframe market, more PC price cuts and ongoing industrywide shake-ups.

Winter traditionally is the time to buy computer stocks, he explained. But this year, due to the worldwide economy, he's considering only diversified companies in fast-growing areas.

Be patient, some counsel. "I see the PC industry improving due to strong demand, and, while gross margins are coming down, manufacturers have been able to cut other expenses," said Wendy Abramowitz, analyst with Argus Research Corp.

"Although price-cutting continues, it's been going on for so long that the cuts aren't as great."

The Clinton administration should provide a firm such as Computer Sciences with more federal business, McClellan believes. This firm in the outsourcing of services has a 20 percent growth rate.

Other McClellan picks include Automatic Data Processing, an acquisition-minded company that handles business payrolls; General Motors Class "E," which is really EDS, dominant in outsourcing of data processing and turning out 15 percent earnings growth; and Computer Associates International, which provides software packages to big mainframe users and recently changed pricing schemes.

BMC Software, with innovative software for large data processing users, is a volatile McClellan pick. Sun Microsystems, with a new workstation product, merits a "buy" rating from


Rueppel, and an "attractive" opinion from Smith.

Supermac Technology, a leader in color graphics and desktop video, fits in Smith's "attractive" category, as does ElectroCom Automation, which makes sorting machines for the Postal Service. Cray Research is suggested by Rueppel because of its tremendous market position and new products, while Silicon Graphics gets the nod because it's among the best-positioned in the important graphics niche.

In software, Microsoft Corp., its Windows selling well and Windows New Technology a hit, is a recommendation of Abramowitz.

IBM stock should be sold, according to Smith. It receives a "neutral" designation from both Rueppel and Abramowitz. Only because of IBM's dividend is the stock as high as it is, and, if mainframe sales continue so poorly, that dividend may be difficult to support.

Apple Computer, an Abramowitz recommendation, gets a "neutral" rating from Smith. Despite good products and unit growth, profit margins must improve. Hewlett-Packard, also suggested for purchase by Abramowitz, receives Smith's "neutral" designation. It's well-positioned for the time when international demand finally increases.

Digital Equipment is rated "attractive" by Smith and gets an "outperform the market" opinion from Rueppel. It has restructured and should be profitable in mid-1993.