Monday, January 24, 2000
Compaq starts getting its act together
After more than two years of floundering and false starts, the world's largest PC maker is perking up and looks ready for further big gains.
By Michael Sivy
At a time when mergers among drugmakers and Internet stocks are going wild, it?s worth remembering that such deals don?t always pay off right away. Bigger may be better?but only in the long run. For a year or two following a merger, even the most successful company is likely to stumble, and post-merger share price drops can create great buying opportunities. Even after a depressed stock has started to rebound, there?s still a chance to get on board. Compaq is a perfect case in point.
The world?s largest PC maker may look inept today, but it was only a few years ago that Compaq ranked as one of the most dazzling tech stocks. From 1993 to ?97, the share price soared more than 14-fold. Then Compaq acquired Tandem Computers and Digital Equipment. These deals would not only make Compaq bigger, but more importantly, they were supposed to lessen the company?s dependence on the PC business, where price-cutting was eroding margins.
On paper, this was a terrific strategic plan. Investors expected that it would take a few months for the deal to shake out, but that after that the stock would take off. And sure enough, after plateauing in the summer of 1998, Compaq shares rallied to an all-time high of $51 in January 1999.
Investors were far too optimistic, however. Since early ?99, Compaq has suffered a series of reversals. Integrating Digital?s operations has been far more difficult than anticipated. In addition, Compaq was much too slow cutting the cost structure of its PC manufacturing operations. The result: even though overall PC sales grew nearly 22% last year, Compaq posted losses in the second quarter. The company is scheduled to report full-year results on Tuesday, which aren?t expected to exceed 35½ a share.
The real question is where Compaq goes from here. Analysts are waiting to hear the company?s conference call on Thursday, but a few are turning more bullish in advance. On Monday, two analysts issued buys on the stock with a target price of $40.
Last June, we recommended Compaq in MONEY magazine at $22.25 a share, saying that it was a classic turnaround play for investors willing to ride out short-term uncertainties. Since then, the stock has rallied $10 a share as the company?s outlook has improved. Still, at just over $32 now, Compaq offers substantial further upside.
First, the company is steadily chipping away at its costs in the PC business, partly by increasing its direct sales. And as time goes by, it will improve the integration of its various divisions. There?s even a kicker?an entree to the Internet through the substantial stake in CMGI Compaq received when it sold Alta Vista to that company. What all this means is that Compaq is still an 800-pound gorilla?it justs needs to finish figuring out how to generate profits that are in line with its sales. And that requires just a little more time. MS
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Attention readers: We?ve finally added data to Michael?s Top 100 Stocks showing the ratio of price-to-earnings to projected 5-year earnings growth rate?also known as the PEG ratio?for each stock. This ratio, which will be updated at the end of each week, is an important part of evaluating a stock?s valuation (for more information on how to look at PEG ratios, see Michael?s article). Check out the latest data here.
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New today on Money.com:
Get Bethany McLean's take on today's market action, in "The Incredible Shrinking Dow."
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Check out Michael's "Forecast 2000".
Profits are strong. Inflation is tame. Are we in a new era? Sure. But you still need a smart strategy to cash in, and Michael Sivy provides one. Also, log on to our interactive poll to share your predictions for the stock market and the economy.
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Readers respond to Sivy on Stocks
Marty Mcfly
I would like to point out a very interesting stock to every one on this sight.SMFT is a technology based training company that has a very uniqe position in an industry that hasnt seen the real money yet.This stock is rated #1 for short term growth in the Marty Mcfly top 100.In fact myself as well as many other well known Wall street characters forcast this stock to go from 40 to 400 in a matter of months.
Joe
Would you comment about JDSUniphase? And if you believe there are others out there in the same industry that can do as well but may still be at the brink, and have not gone nuts in price as this stock has. Thanks
Ernest
Hey, back to the future guy. Take it to the smft board at YAHOO!
I bought compaq after your advise, and Edward Jones's S/Buy, in July or Aug. Been tempted to dump it about every week since. Glad I never... But of course, about the same time I took one of your featured analyst's advise and bought PGDA, which promptly dropped 50% before I dumped it...Oh, well...and yes, I thought I had done my dd on it.
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