Tech stocks cheapest in seven years as profit estimates drop

Budget Deficit

The U.S. government will spend less on information technology in the next three years, curbing revenue for companies from IBM to Oracle Corp. and BMC Software Inc., data from Bloomberg Industries and the U.S. Office of Management and Budget show. The budget deficit narrowed in March as spending shrank almost 21% during the first month of mandatory federal cutbacks known as sequestration. The $1.2 trillion in across-the-board reductions are spread over nine years as part of a 2011 deal to increase the U.S. debt limit.

IBM Chief Financial Officer Mark Loughridge said in an April 18 conference call that the company’s U.S. federal business fell 13% last quarter, calling it a “drag on the U.S. performance.” F5 Networks Inc. said on April 4 that spending cuts dragged down government sales and forecast quarterly revenue that missed analyst projections. Shares of the company, which makes data-management equipment, have tumbled 24% this year.

Harris Corp., which sells communications equipment to the military, cut its profit and sales outlook for the year on April 11, citing delayed orders from U.S. agencies. Analysts forecast the Melbourne, Florida-based company will post the biggest profit drop since at least 2003. The stock has slipped 5.2% this month, to trade at 9.7 times projections.

Sales Miss

Motorola, the maker of two-way radios and bar-code scanners, fell the most in more than two years after saying second-quarter profit and sales would trail estimates. The company is depending more on its government customers, which account for about 70% of revenue, as corporations defer orders, according to Chief Executive Officer Greg Brown.

“We saw customers delay or defer some key purchases” in logistics and retail in particular, Brown said in an April 24 interview. The price-earnings ratio for Schaumburg, Illinois-based Motorola fell to 15.5 last week, down from 17 earlier this month.

When technology shares outperform, the U.S. economy has seen bigger expansions. In quarters when the group rallied the most or second-most in the S&P 500, the U.S. expanded 3.2%, compared with the average of 2.4% since 1989, data compiled by Bloomberg show. The growth rate falls to 0.8% on average when computer shares trail the S&P 500.

Economy Watch

GDP will increase 2% this year, down from 2.2% in 2012, according to the median of 80 economists’ forecasts compiled by Bloomberg. Last quarter’s 2.5% growth fell short of the 3% gain projected.

The International Monetary Fund has cut its outlook for global growth the past four quarters, and China’s economy, the second-biggest in the world, expanded at a slower-than-forecast pace in the first quarter, helping drag commodities such as gold and copper into a bear market. Economists project Europe’s GDP will contract for a fifth quarter in the three months ending in June, falling 0.3% after a 0.5% decline in the first three months of 2013.

Orders for U.S. non-defense capital goods excluding aircraft, a proxy for future business investment in equipment such as computers and communications gear, rose 0.2% last month, less than estimated and failing to make up for a 4.8% slump the previous month, according to a report from the Commerce Department April 24.

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