Investors in PC components from wireless mice to monitor display screens may want to pay heed to the root cause of Intel's (Nasdaq: INTC) recent fourth-quarter warning -- PC component sales are expected to slow as supply-chain customers apply the brake.
Why apply the brakes as we head into the holiday selling season? The Grinch is Thailand's monstrous monsoon flooding, which temporarily knocked off more than half of the hard disk drive (HDD) production coming out of the country in October.
PC manufacturers are apparently deciding,"Why load up on purchasing other components to build the box, when some key parts are missing?" Their rationale is that it would be like shelling out a ton of money to purchase all the parts to build a car but missing the motor as the vehicle makes its way down the assembly line.
Or, as Intel says in its fourth-quarter warning:
Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of HDD supply shortages. The company expects HDD supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of HDDs recover during the first half of 2012.
Through the looking glass
Liquid crystal display (LCD) manufacturers for notebooks, netbooks, and desktop monitors are likely to feel the impact from the HDD shortage, as demand for low-end mobile PCs and monitors softens, according to an announcement this week by industry research firm NPD DisplaySearch.
Monitor makers whose products are bundled with a PC have been hit hard by the HDD shortage and softening demand, while standalone monitor makers have suffered less, according to a DisplaySearch industry announcement Wednesday. Low-end mobile PC devices such as netbooks and low-margin 15.6" laptops are also expected to undergo a cut in production.
According to Chris Connery, vice president of PC and IT displays for DisplaySearch, it wouldn't be surprising to see a 3% drop in fourth-quarter sales for notebook, netbook, and desktop monitors because of the HDD shortage.
On the surface, the shortage doesn't bode well for LCD panel makers such as AU Optronics (NYSE: AUO), whose display screens go into a large number of mobile PCs and monitors. But Connery notes that a number of the industry titans such as AUO, which is the fourth largest LCD panel maker in the world, are well diversified and that TVs play a greater importance than computers.
Large-area displays -- LCD panels that are 9.7 inches or larger -- are expected to reach 183 million in shipments during the fourth quarter. Netbooks are expected to account for 3% of unit shipments and notebooks 27%, Connery says. Monitors are expected to account for 26% of the large-area displays, of which roughly two-thirds come with the computer. TVs, however, are expected to comprise 29% of unit shipments.
"The real barometer of how things are going is TV sales," Connery says. "That's because of the volume [in sales] and size of the screen."
With fourth-quarter production of LCD TVs approaching a record high, investors may be smart to buy on any weakness LCD panel players AUO or LG Philips LCD (NYSE: LPL) may exhibit because of he temporary HDD shortage.
The camera never blinks
Camera-chip maker OmniVision (Nasdaq: OVTI), which took a horrendous hit over the summer when its quarterly outlook raised fear that it would lose a slice of its Apple iPhone business, is expected to keep a steady gaze as it stares into the HDD debacle.
OmniVision chips largely go in high-end smartphones and notebooks. And it's the high-end devices that PC makers are favoring for allocating their limited supply of hard drives. As a result, OmniVision has little exposure to the hard-drive shortage.
Although the shortage is not a huge issue for OmniVision, there are plenty of other problems the company faces that make buying on weakness a leap of faith, rather than an opportunistic one-time move, for investors.
Of mice and men
Logitech (Nasdaq: LOGI), like other external-component makers such as Netgear (Nasdaq: NTGR), sees its fortunes ride on consumer whims, rather than on computer makers that are hunting for internal components.
As a result, Logitech's sales are affected only to the degree that PC shipments decline as a result of the hard-drive debacle. Why buy a wireless mouse if there's no new snazzy PC to link to?
For Logitech, the impact from the HDD shortage is likely to be minimal, even though it receives roughly 90% of its revenues from selling peripherals.
That said, if Logitech issues a warning because of the shortage, it may present a time to buy on weakness. The company has a few catalysts in the making to drive its share price higher: A new CEO is fixing a stuffed inventory channel in Europe, and its LifeSize video-conferencing business is expected to turn an operating profit in its March quarter and will begin a share buyback in late January.
Takeaway
The HDD situation is expected to improve over the next six months as production ramps up, so now is a great time to take a good look at PC component companies that have taken a short-term hit following the Intel warning.
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