kenya,
Wall Street thinks as you do: lower pc prices = lower margins = lower earnings. But don't forget that the high-end (and high-margin) server market is on fire, and Compaq holds the lion's share of this market. That is why Compaq's margins have been rising, NOT falling--about 23% last year vs about 27% this year.
You are right that the growth rate in PC sales is slowing (though I know many businesses that would be very happy to be in a 15% growth market). However, the market trend is towards the "Big Four" computer makers (Compaq, IBM, Dell, and HP) and away from the others. Since the "others" currently have 60% market share, there is a lot of room for Compaq's market share to increase, which it has been doing. In the last three years, Compaq's world-wide market share has gone from approx. 10% to 12% to 14% this year.
The third big fear--Asia--has yet to play out. But Compaq buys its components as cheaply as anyone (or cheaper--its volumes are larger) and the deflation in component prices is likely to help Compaq much more than loss of Asian sales will hurt it. Only 6% of Compaq's sales are to Asia, while the majority of its component purchases are from Asia.
So the question becomes, is there any Asian PC manufacturer in position to manufacture, distribute, and market PC's cheaper and better than Compaq? I don't see one.
Of course, Wall Street may compress Compaq's multiples anyway. Last spring it was trading at 15 x trailing earnings and 11 x forward earnings. But unless you can see some fundamental bad news, I would still continue to accumulate and hold this stock. Just MHO. |
