Computer Hardware Firms Slip

Almost half of the computer hardware companies surveyed in a recent report had earnings returns that trailed even passbook savings accounts last year, according to an investment banking firm specializing in information technology company mergers.

The other side of the technology coin, information services companies-which include firms involved in software, publishing, printing and related supplies, marketing services, database and computer processing-fared better.

As a result, investors have fallen out of love with the high-tech hardware firms, once considered the darlings of Wall Street. The median market-price to book-value ratio was 1.4 to 1, the study found, which is about the same as representative cross-industry indexes. For information services companies, the ratio is 2.5 to 1.

Harvey Poppel, a partner at Broadview Associates, Ft. Lee, N.J., said his firm studied more than 463 publicly held U.S. information technology firms in both the hardware and information services sectors, with total revenues of more than $200 billion.

About 44 percent of the companies classified as computer and communications hardware firms had returns on equity of less than 5 percent. The median return was 6.5 percent. Hardware distribution and retail companies outpaced the manufacturing end, averaging about an 8 percent return.

The information services companies, however, averaged 15 percent returns, which is above the traditional 11 percent average for all U.S. companies, according to Poppel. The Standard & Poor`s average for all U.S. companies has not yet been released for 1987.

Among the information services companies, software products companies performed the worst, showing some of the same volatility as the hardware group, the study found.

“This is the worst performance for the hardware companies in the four years that we`ve been tracking these kind of results,“ he said. “For the previous two years, when the average was in the 7 to 8 percent range, we blamed it on the computer slump. But 1987 growth rates were pretty good.“

Revenue growth for hardware companies averaged 10 percent over the previous year. Not including International Business Machines Corp., revenues were up 14 percent.

“The turnaround is here, but the profits still aren`t,“ Poppel said.

One of the major handicaps faced by computer hardware makers is that their products, which have very high research and development costs, have short life cycles, Poppel said. In addition, most of these companies are involved in a global marketplace, and have suffered from Asian price slashing and consumers` continued expectations of yearly price and performance improvements. Services companies face few of these problems.