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Buckingham Research Notes
12:08pm EDT 25-Aug-99 Buckingham Research Group (Labe, Peter)
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CPQ Compaq Computer's management is starting to make some of
Market the hard technical decisions, short of dropping the
Perform Alpha line (or something similar). One such decision
$23 1/2 was to discontinue Alpha support for Windows NT.
Salesmen were expected to walk into an account and say
we have an Intel NT solution like everybody else, but
only we have the Cadillac (i.e., the much faster Alpha
system at a premium price). Users didn't buy into this.
Instead, the focus will shift to support of 64-bit
Windows NT, which is still in the early phases of
development. The second decision was to modify the
company's position on Open VMS in a letter to employees
on August 12. This is the former DEC proprietary
operating system that is in widespread use, but has dead-
ended. Compaq needs to be careful here, for this is a
large and highly profitable base. The new policy seems
to be: invest in e-business solutions; and invest in
solutions for target markets. All others, we surmise,
will have to migrate, hopefully to one of the other
Compaq platforms, principally the 64-bit UNIX and
Windows NT platforms. By doing this, Compaq has ended
its costly across-the-board support. Both of these
steps make some sense, but we still believe it is going
to take more time before we see any significant signs of
recovery. Thus, we think investors will have time to
access how some of the changes are taking hold. We
continue to rate the stock a Market Performer.
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DELL We aren't hearing anything particularly new out of Dell
Buy Computer. We believe that demand is still good, and
$46 3/8 feel quite confident about the next two quarters. The
company has an all-day analyst meeting scheduled for
Thursday, October 7.
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GTW Demand at Gateway 2000 was strong in August, and the PC
Buy industry seems quite healthy. Gateway stock has traded
$97 up 29% from $75 1/8 at the beginning of August. The
revaluation of the stock that we have been anticipating
for the last 6-12 months now finally seems to be
occurring. If we are right, this move in GTW stock is
not yet complete. We continue to recommend the purchase
of GTW with a near-term target price of $112 per share.
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MUEI Micron Electronics' "free PC" promotion, which actually
Market entailed about $1,000 or $1,100 in spending on a package
Perform of goods and services, appears to have generated lots of
$9 15/16 calls but few orders. The consumer sector is a real
struggle for Micron, and we don't see this as a
strategic area for the future. The mid-market for
business and government seems to be about on plan. The
60 sales teams in 12 markets has had some personnel
turnover and looks about flat in manpower versus a
couple of months ago. Services currently comprise about
3% of revenues and are growing, which is a key part of
the plan for next year. The consensus EPS estimate for
the company's fourth fiscal quarter is $0.07 (which is
also our estimate) and we believe this estimate will
probably be exceeded, but not from the right source (the
PC business). Strengthening in MUEI's DRAM business in
the last 3-4 weeks has probably improved the
profitability of the SpecTek secondary memory operation,
which is what has happened in the past. We are not
revising our Market Perform rating on Micron Electronics
or our August 1999 fiscal year EPS estimate of $0.30 at
this time.
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TECD A competitor upgraded Tech Data to a Strong Buy this
Buy morning, and the stock is up by more than $4 per share
$32 5/8 from yesterday's close. Some investors chose to short
the stock after a negative scenario from this competitor
in July that was based on pricing of CPQ products by
another distributor. The resulting short squeeze may
account for the big pop in the stock price. HP products
accounted for 20% of TECD sales in the April quarter, up
from 18% in the January 1999 fiscal year. We continue
to believe that the strength of HP and Cisco will more
than offset any weakness in Compaq in the company's
marketplace. We are assuming that HP and Cisco
accounted for 25% of TECD sales in the July quarter.
TECD will report its July quarter numbers on Wednesday,
September 1, after the close. The conference call
starts at 4:30 PM and is by invitation only. We retain
our BUY rating on TECD with a $60 per share target
price. Our high on the Street July quarter EPS estimate
is $0.56 versus $0.55 last year and the current Street
mean estimate of $0.54.
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