It has never bothered me that I have been the only person I know who loves my eMachines computers. The computers are inexpensive, and they are more than adequate for my word processing, Internet surfing, and number crunching (although my brother-in-law, the computer genius, would beg to differ). I even purchased an eMachines wide-screen laptop that I love; I'm typing this story on it.
It was a pleasant surprise to see that previously slumping personal computer (PC) maker Gateway (NYSE:GTW) recently completed the acquisition of eMachines. The addition has vaulted Gateway to the No. 3 spot in the domestic PC market, behind industry leader (and Motley Fool Stock Advisor recommendation) Dell (NASDAQ:DELL) and second fiddle Hewlett-Packard (NYSE:HPQ), but ahead of IBM (NYSE:IBM) and Fujitsu.
A look at Gateway's third quarter results reveals an operating profit for the first time since the fourth quarter of 2001, which adds up to a drought of 11 consecutive quarters. This is obviously good news for a company that appeared to be lost in a pile of Dell and Hewlett-Packard computers. If you back out the company's one-time restructuring and integration charges of $63 million, Gateway would have reported an operating profit of $4 million.
Revenue growth increased 3.6% over last year and 9.2% from the second quarter (on a 17% increase in PC shipments), but was 2.3% below the consensus estimate.
However, the real story for Gateway's earnings must be its improved cost controls. CEO Wayne Inouye says, "executing on the basics led to accelerated cost savings and gross-margin improvements across all segments." Inouye also believes the company is "on the right track," although he does acknowledge that the bulk of the hard work still lies ahead.
Gateway's outlook for the fourth quarter is for revenues in the $975 million to $1.03 billion range, which is currently under the $1.08 billion average estimate. Once again, the story of the next quarter should be margin improvement, as Gateway expects a $0.01 to $0.02 per share operating profit; these earnings are projected to be higher than the flat ($0.00 per share) results previously expected.
Gateway shares, which were up more than 6% in trading today, are showing some life after dipping below $4 per share most of the summer. The 50% appreciation to nearly $6 per share must be seen as a sign that investors are regaining confidence in the previously forgotten PC maker. With the company starting to earn a profit and return to double-digit, long-term growth prospects, it should be viewed as a legitimate PC investment candidate.
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Fool contributor Phil Wohl spent more than 12 years on Wall Street and has a real affinity for his eMachines wide-screen laptop. He does not own shares of any of the companies mentioned.
