Compaq Squares Off Against Analyst
Over Report of Rising Inventories
By Thomas Lepri
Staff Reporter
6/30/00 7:43 PM ET
More than a year after CEO Eckhard Pfeiffer was shown
the door, talk remains cheap at Compaq (CPQ:NYSE -
news).
Investors lopped 11% off the company's shares
Thursday after Salomon Smith Barney analyst
Richard Gardner downgraded the stock on
second-quarter revenue and inventory concerns. And a
rebuttal from Compaq combined with a groundswell of
support from the analyst community did nothing to stop
the bleeding. Friday, while the rest of the PC sector
rebounded from the prior session's sympathy selloff,
Compaq slid another 1/8 to 25 9/16. (Solly has no
recent underwriting relationship with the company.)
The week's events have put a new cloud of uncertainty
over a company that is clearly still struggling to restore
Wall Street's faith in its credibility. That cloud could
linger until Compaq reports its second-quarter earnings
in late July. In the meantime, investors must
contemplate the stark difference between Gardner's
caution and Compaq's reassurances.
Dispute Ensues Over Campac's
Inventories
In his note, Gardner called attention to possible
inventory pileups at Compaq on both the corporate and
retail sides. Of the latter, he wrote: "We have talked
extensively about the weakness in U.S. retail PC sales
this quarter, and we believe that Compaq's channel
inventories are the highest among the major retail PC
vendors."
Compaq immediately fired off a denial, saying that its
channel inventory, or products held by resellers and
retailers, "has been low and in some cases near
stock-out levels."
It shouldn't be surprising that Compaq's defense has
received a lukewarm response from investors, who still
recall the boxmaker's 1999 difficulties. Many analysts
were caught by surprise by the profit warnings Compaq
issued in last year's first half.
Given that history, why are so many on the sell-side
sticking up for Compaq? A host of analysts, including
Donaldson Lufkin & Jenrette's Kevin McCarthy,
Merrill Lynch's Steve Fortuna and Lehman Brothers'
Dan Niles have come out and defended the company
against Gardner's attack. (None of those brokerages
have performed recent underwriting for Compaq.)
"A lot of people upgraded Compaq over the last three
months," says David Bailey, an analyst at Gerard
Klauer Mattison, which hasn't done any underwriting for
Compaq and rates the stock a hold. "They don't want
this story to come out now."
Of course, Gardner could be just plain wrong. The
company's resellers, for their part, are singing the same
song as Compaq. "We've decreased our inventory
substantially from the beginning of the year," says Terry
Tysseland, senior vice president of operations for
Ingram Micro (IM:NYSE - news), which resells PCs for
both Compaq and Hewlett-Packard (HWP:NYSE -
news). Ingram declined to give precise figures on current
inventory levels.
But there may be more to the story. According to David
Goldstein, president of Dallas-based research firm
Channel Marketing, it's not unusual to see overall
inventories decline over a year's first half. "Seasonally,
at the end of the second quarter, inventories are usually
down vs. the first quarter," he says. "But when you look
at the number of weeks of inventory this year versus
last, it's higher than a lot of folks would like it to be."
Low-End PC Price War Coming
Fears about rising inventories made headlines last
week, when eMachines (EEEE:Nasdaq - news) warned
that poor demand for cheap PCs would cause it to lose
30 cents to 33 cents a share in its second quarter. That
demand problem had inflated the company's inventory to
five to six weeks, says President and CEO Stephen
Dukker. What's more, Dukker claimed inventories of
low-end PCs were also rising at Compaq and
Hewlett-Packard. "As discounting begins," he says,
"that will pull in dramatically."
In other words, get ready for a price war in the low-end
PC market.
To Goldstein, the discounting of low-end PCs that
Dukker presaged could be one explanation for the
seeming variance between the Gardner and Compaq
positions. "Over the last several weeks, there has been
tremendous price cutting on the part of companies like
Compaq and eMachines to move some inventory
through the channel," he says. "The inventory in the
channel is recent. It's the result of recent price cutting.
That got [PCs] out of [Compaq's] warehouses and into
the channel."
Price cutting has already helped Compaq move "tens of
thousands of units over the last three weeks," according
to Goldstein. Compaq didn't return a call seeking
comment.
But Price Cutting Could Hurt Margins
In the meantime, investors in the PC sector must wait
for the sound of dropping shoes.
Goldstein stresses that even though inventories look
high, "they're not alarmingly high." But aggressive price
cutting could put pressure on Compaq's margins. In his
note, Gardner wrote that Solly was reviewing its
earnings-per-share and revenue estimates for Compaq.
And GKM's Bailey -- who, it should be noted, thinks
there are more important issues at Compaq than
short-term inventories -- suspects the company "might
come up a little short" of its revenue estimates. "And
that's not a good sign," he says. "This is a difficult
turnaround."
Analysts expect Compaq will earn 21 cents a share in
the second quarter and $1.08 a share for the year,
according to First Call/Thomson Financial.
Meanwhile, H-P maintains that its inventory is under
control. "We are not having the same problems," says
spokesman Steve Pavlovich. "We feel very good about
inventory in both the retail and commercial channel. On
the commercial side, we have about three weeks, and in
some lines even less than that." Pavlovich says that he
wasn't sure about inventory levels on the retail side, but
says that "three weeks or less is fair. We've had a
number of questions on this subject, and our PC folks
are feeling good about the situation now."
Send letters to the editor to letters@thestreet.com.
Read our conflicts and disclosure policy.
Order reprints of TSC articles.
Top
RELATED STORIES
Hardware & PCs
Handhelds Hot, PCs Not at New York's PC Expo
6/28/00 8:15 PM ET
PCs make way for Internet appliances, handheld computers and
other gadgets.
Hardware & PCs
As Rambus Rallies, Nasdaq Watchers Relive the Days Before
Gravity
6/23/00 4:40 PM ET
The stock's 40% run-up last night rings that momentum bell in
some precincts. |
