Closing Market Report

Star-Bulletin news services

Tech self-off was overkill,
businesses to keep stocking
up on equipment

NEW YORK >> Cisco Systems' cautious comments on future demand for its networking products may have temporarily tanked technology stocks, but that doesn't mean companies won't splurge on capital improvements this year.

Economists are forecasting a double-digit rise in business spending in 2004 as companies look to replace equipment and revamp production facilities after three years of cost cutting and layoffs. The industrial sector, shipping providers and technology concerns will see the biggest influx of cash, analysts say.

But Cisco chief executive John Chambers' remark that the recovery was "still fragile" sparked a sell-off Wednesday, sending the tech-heavy Nasdaq composite index plunging 2.5 percent.

Analysts think that decline might have been a bit of overkill.

"If you really look at what Mr. Chambers said, he didn't say business spending is not going up, he was just saying at this stage of the recovery you'd think it would go up a little more," said Peter Cardillo, chief strategist for S.W. Bach & Co. "I think the market misinterpreted that a little bit and it became a catalyst to sell off."

Despite Cisco's statement, there's plenty to suggest businesses will increase their spending this year. Orders for industrial goods and equipment are rising, corporate profits are up and, perhaps most significantly, business confidence has vastly improved over last year, said Lynn Reaser, chief economist with Banc of America Capital Management.

Through much of the bear market, companies "have been in a lockdown mode," she said, putting technology budgets on hold and postponing the purchase of discretionary items. Now, if they want to increase productivity, they're going to buy some new stuff.

A provision of President Bush's tax plan offers further incentive: Companies can write off 50 percent of any capital investment they make before the end of the year, thus reducing their tax bills.

Overall spending for equipment and software rose dramatically in the second half of 2003, and Reaser expects that trend to continue this year, at rates of 12 percent to 16 percent. It would be a mistake for investors to extrapolate Cisco's tentative outlook to the tech sector as a whole, she said.

"In the current earnings environment, a company like Cisco may have incentive to be conservative in its forecast, because companies are so severely punished for missing expectations," Reaser said.

Another reason for the steep decline could be that investors were concerned about inflated valuations, Cardillo said. After watching the Nasdaq roar 7 percent higher last month, he said, investors were looking for any reason to sell.

With stock prices so high, money managers are being careful about where they place their bets. Large tech providers, especially telecommunications companies, may already have seen the best of the increase in business spending, said Jeff Kleintop, chief investment strategist for PNC Financial Services Group. Software companies, like data management specialist Veritas, may have more to gain, he said.

"As more demand comes in, one of the things companies are hesitant to do is to hire a big sales force, especially after they just got done laying so many people off," Kleintop said. "If better software can improve their efficiency at a lower cost, they're willing to spend money on that."

Kleintop is also watching broad manufacturing firms, like industrial equipment maker Ingersoll-Rand and Illinois Tool Works, a conglomerate of 600 companies that makes a lot more than just tools. A step-up in orders means business will also be good for shippers and transport providers like freight carrier Union Pacific Corp.

But bargains are hard to find, even among diversified manufacturers, said Eric Landry, an equity analyst with fund and stock tracker Morningstar Inc. Even taking the expected spike in business spending into account, Landry said, the group seems very expensive.

"Illinois Tool Works is a company we love. We love the management, we love the business, we just don't love the price," Landry said. "I feel about the same way about Ingersoll-Rand. It's trading a little bit rich for our blood, and we would exercise caution."

For the week, the Dow Jones industrial average was up 104.96, or 1.0 percent, at 10,593.03.

The Nasdaq lost 2.14, or 0.1 percent, to 2,064.01. The Standard & Poor's 500 index rose 11.63, or 1.0 percent, to 1,142.76.

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