Dow Jones Newswires -- September 19, 2000
SmartMoney: Street Smart - OK Computer
Dow Jones Newswires
This story appears in the October issue of SmartMoney
magazine.
By Odette Galli
Poor Compaq.
Once the largest commercial personal computer maker in the
U.S., this slumbering giant saw its profits slashed when
competitors such as Dell and Gateway stole market share by
selling PCs directly to customers. Then it fell behind Sun
Microsystems, Hewlett-Packard and IBM in transforming itself
into an "enterprise systems" company, with solutions, services
and hardware to equip e-commerce activities. Plus, the
consumer PC business was attacked at the low end by
sub-$600 computers from upstart competitors. All this has left
Compaq's shares down 37 percent from their 1999 high, and at a
price/earnings ratio of 29 times 2000 estimated earnings of
$1.08, a big discount to Dell's P/E of 41.
Invest in this company now? We've got to be kidding, right?
Not at all. The contrarian case for Compaq starts with CEO
Michael Capellas. Within days of taking over from ex-CEO
Eckhard Pfeiffer last year, Capellas pushed through a major
restructuring, including a 12 percent layoff and the closing of over
3 million square feet of facilities space. More important, he is
transforming Compaq into an Internet infrastructure player. "In
two years, I want customers to say, 'I access the Internet on my
Compaq - - and the Internet runs on Compaq,'" the CEO
explained in a conference call with analysts in late July.
For Compaq watchers, including Daniel Kunstler, a Wall Street
Journal top-rated analyst at J.P. Morgan, that's exactly the right
message."Capellas recognizes where the market is going and
wants to participate," Kunstler says.
Compaq's troubles date to its $9 billion takeover of Digital
Equipment Corp. in 1998. At the time, it seemed to be the
perfect way for Compaq to do battle with Sun, HP and IBM.
Along with its 1997 acquisition of Tandem Computers, it turned
Compaq into a one-stop shop for everything customers needed
for e-commerce. The concept looked so good that in January
1999 we recommended Compaq as one of our 11 "Best
Investment" stocks for that year.
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