From our friends at Bear, Stearns & Co. .....
Andrew J. Neff (212) 272-4247 aneff@bear.com 1/12/99
Shaw Wu (212) 272-5928 swu@bear.com
William Bao Bean (212) 272-6915 wbean@bear.com
Subject: Company Update
Industry: Computers & Office Equipment
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
Compaq Computer Corporation (CPQ-48 3/8) - Buy
Buys Shopping.com; Strengthens Alta Vista Position; Maintain Buy
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*** Key Points. Joining the ranks of e-commerce players, Compaq
yesterday said that it will acquire online retailer Shopping.com
for around $200 million in cash to as a way to offer Internet-
based shopping to new customers and Internet users. Compaq plans
to combine Shopping.com with AltaVista search site. The
combination of the two could enhance the value of AltaVista,
which was purchased as part of the Digital Equipment acquisition,
either as part of Compaq or as a spin-off, which has been a
possibility for AltaVista. The idea is to meld the two operations
together to provide a destination for AltaVista users and to link
the busy AltaVista Internet search site to Shopping.com's site,
multiplying the online retailer's potential base of customers.
Shopping.com has a mixed reputation with recent bad publicity for
poor service, but Compaq management indicated that they were
buying the company for its online shopping engine and that they
needed to work on repairing its image with customers.
Shopping.com uses a sophisticated retail computer network to
contact suppliers that ship orders directly to its customers,
eliminating the need to warehouse inventory, slashing capital
requirements compared to traditional storefront retailers.
Even more significant, in our view, may be the implication
that Compaq's board is sufficiently comfortable with the status
of the Digital acquisition to move forward on another deal.
We'll get a better sense of that when Compaq reports on January
27; our estimate is $0.38 vs. $0.42.
The other issue is that issue could more closely tie Compaq
with e-commerce, an association which has been clearly beneficial
to the multiples of Dell, IBM, Sun Microsystems, Intel and
others.
*** Compaq: The Bigger Picture. At a meeting we hosted with
Compaq CEO Eckhard Pfeiffer recently at Comdex, we got a much
better sense of perspective of the thinking behind Compaq's
recent moves. Essentially, he reminded us that Compaq is acting
on the plan it developed in 1996 on where it wanted to be in the
year 2000 and what steps and tactics it needed to take to get
there. In that context, Compaq's actions - such as the recent
launch of its direct sales to small/medium business - are easier
to understand: essentially, Compaq's agenda is to develop the
appropriate distribution strategies for each business segment:
major accounts, small/medium business and consumer, where the
goal is to optimize for each segment and add direct efforts to
extend its reach beyond the indirect channel. The goal withmajor customers is to "own the customer" through a team-based
selling effort of Compaq total product and services capabilities.
*** Comfortable with 4Q Outlook. In our recent conversations
with Compaq management (before the company went into the quiet
period), they appeared comfortable with the fourth-quarter
consensus estimates of $0.36 vs. $0.42; our estimate is $0.38.
We are looking for 27% sequential growth in revenues to $11.1
billion due to our expectation of a stable U.S. enterprise
business, seasonal stronger season for U.S. retail, and a pick-up
in European enterprise as well as a snapback in the traditional
DEC business after transitional factors diminish. We also expect
CPQ to make progress on operating expenses in MG&A via further
headcount reductions. We are maintaining our estimates for 1998
of $0.50, for 1999 of $1.75 and for 2000 of $2.25, implying
significant improvements in its margins as a result of growth of
services and reduced operating expenses.
*** Maintain Buy. While we recognize that there are still
hurdles associated with the integration of Digital Equipment, the
transition in distribution model, and competitive industry
conditions, we are maintaining our Buy rating in view of the
company's positive outlook going forward and compelling
risk/reward equation. We believe the company is well positioned
with the No. 1 position in several key businesses including
corporate and consumer desktops, portables, NT workstations,
servers, and fault-tolerant systems. In addition, the company
has the opportunity to lower operating expenses and grow revenues
in storage, Asia-Pacific/Japan, services, as well as its
traditional markets.
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