Maybe this has caused a scare today - who knows?
The Lunchtime News
Jun 15, 1999
FOOL PLATE SPECIAL
An Investment Opinion
by Chris Rugaber
Compaq: Bigger is Not Always Better
Diversified computer company Compaq (NYSE:CPQ - news) has continued to struggle in recent months, and last week one analyst warned that the company may even post a loss in its upcoming quarter. This presumably disastrous news caused only a slight drop in Compaq's stock, which had already fallen more than half from its January high of $48.875.
Such a sanguine reaction is presumably why several analysts, including a guest on CNBC's "Squawk Box" this morning, are pointing out the apparent lack of any further downside in the company's stock. Indeed, even Piper Jaffray's Ashok Kumar, the analyst who puts the chance for a second quarter loss for Compaq at better than 50/50, rates the company a "buy."
Nevertheless, investors may want to wait a bit before jumping in. Compaq's acquisitions of Digital Equipment Corporation and Tandy in recent years, as well as its apparent Internet strategy -- it owns the search engine Alta Vista and has purchased a couple of e-commerce sites -- make it more of a sprawling conglomerate with a multitude of interests, rather than simply the "largest PC maker in the world," as it is often called. It remains unclear whether the company can productively manage all of its operations.
Compaq's board, headed by co-founder Ben Rosen, deserves credit for booting CEO Eckhard Pfeiffer, and plenty of other top management has departed, including CFO Earl Mason and the heads of the workstation and services divisions. One result of all these departures, however, is that the company has plenty of incentive to write off its bloated inventories and take a loss this quarter in order to blame it on previous management.
The new CEO will have his or her work cut out for them, as the company tries to solve its inventory problems and focus on its disparate businesses. One thing the company's recent travails have proven is that bigger is certainly not always better. Pfeiffer tried to make waves by setting $60 billion in revenues as the company's 2002 goal, double its 1998 total. Yet revenue growth hasn't done the company any good, given its inability to make efficient use of its capital.
The company grew revenues almost 33% in 1998, but thanks in part to its poor inventory and receivables management, operating cash flow fell by over $3 billion (and that's in spite of the company adding back over $3 billion in purchased in-process R&D it had written off). Compaq has always had higher revenues than companies like Dell, Cisco, and Microsoft, but those are the leading companies of the decade, due at least in part to their outstanding returns on invested capital (ROIC). As has been written here at the Fool many times before, metrics like ROIC can be far more important than revenue and earnings growth. One wonders if Pfeiffer, who was reputedly obsessed with his company's challenge from Dell, really understood that.
Investors may want to keep their eye on Compaq's new CEO, whenever he or she is hired, because a turnaround is certainly possible. A few spin-offs might even be prudent, and beneficial to the company's bottom line. Yet productive use of the company's assets has seemed just around the corner for awhile now. Last summer, I had the misfortune of writing a "b ull" argument for Compaq, in which I maintained that the company's revenue would "skyrocket." I at least added the caveat that the "question is whether it can efficiently manage its new business model." Almost a year later, that's still the question.
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