Buy Acer shares, Citigroup suggests

Eyeing its continuously strengthening market power and margins, Citigroup suggested that investors buy shares of Acer Inc, despite short-term concerns that the weakening euro could eat into the company's profits.

"Acer remains one of our top picks in the Asian tech hardware universe, given its continuing market-share gains and margin improvements," Kirk Yang (楊應超), head of technology-hardware research in Asia at Citigroup's Smith Barney, said in a report released on Thursday.

Citigroup raised its target price for Acer shares by 12 percent to NT$72 (US$2.27) for the next 12 months, citing the personal computer (PC) vendor's brighter outlook for next year.

Acer's net income is expected to total NT$8.49 billion this year, or NT$3.79 per share, up from the previous forecast of NT$8.11 billion, or NT$3.60 per share, the US investment bank said. Earnings are forecast to keep increasing to NT$10.7 billion (US$336.7 million), or NT$4.74 per share next year, it said.

For the first half of this year, Acer generated earnings of NT$4.02 billion, or NT$1.82 per share, up from NT$2.39 billion, or NT$1.07 per share, a year ago, according to Citigroup's estimates.

Acer's core PC business remained on track as the vendor's momentum continued in Europe, maintaining its No. 1 brand position in the notebook market. The company also kept its place at No. 3 in the overall PC market as it applied its successful distribution model used in Europe and the US to its operations in China, the report read.

The Taiwanese firm overtook Fujitsu to be the world's fourth-largest PC vendor with a 4.4-percent market share in the second quarter, following Dell Inc's 19.3 percent, Hewlett-Packard Co's 15.6 percent and Lenovo Group Ltd's (聯想) 7.6 percent, according to International Data Corp.

The weakening euro -- which Yang estimated would result in a foreign-exchange loss for Acer of NT$150 million to NT$200 million -- represented an attractive buying opportunity in the short term.

Nevertheless, the impact of a weakening euro is likely to be offset by the company's capital gains of between NT$1.4 billion and NT$2 billion by disposing of BenQ Corp (明基電通) and Wistron Corp (緯創) shares in the second half of this year, he said.

But Goldman Sachs downgraded Acer to "equal weight" from "overweight" with a target share price of NT$62, citing an estimated foreign-exchange loss of NT$150 million, which could reduce the company's earnings by 2 percent year-on-year to NT$2.1 billion, the securities house reported last month.

Acer could face a deteriorating gross margin as a result of lowering prices in exchange for a larger market share, tight supply of key components like flat panels and central processing units, Goldman Sachs said.

Goldman Sachs recommended shares of Asustek Computer Inc (華碩電腦), the world's largest motherboard maker, and raised its target price to NT$108, citing lower foreign-exchange losses and a delayed rally in share prices compared with other motherboard makers.

Asustek's earnings for the first half are estimated to grow by 17.35 percent to NT$8.6 billion, or NT$3.37 per share, according to Goldman Sachs' estimates.