James: Are you sure your last name's not Steinberg? (ggg) Here's your thoughts echoed by Jono:
individualinvestor.com
editor-in-chief:
Jonathan Steinberg 11/27/99
Compaq Computer (NYSE: CPQ - Quotes, News, Boards) has been trading like an Internet stock of late. Well, sort of.
Shares have catapulted by over 30% since I recommended them in the October 30 Saturday Group.
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What is going on? Well, for one, Compaq had been beaten down badly as a result of institutional tax loss selling and shares were due for a pop up. Or maybe shares moved higher because of its 17.6% ownership of Internet incubator CMGI (NASDAQ: CMGI - Quotes, News, Boards), whose shares are really trading like an Internet stock, surging by 40% in just a few short days.
More likely, though is that the spike in shares is the result of a recent product and strategy briefing in New York City followed by the Comdex trade show in Las Vegas. Here is why some investors are placing their bets on the beleaguered PC company.
For one, we all know the negatives regarding Compaq. After fumbling with its distribution strategy and strategic direction over the past 18 months, Compaq ceded its leadership position in retail PC market share to rival Dell Computer (NASDAQ: DELL - Quotes, News, Boards) in the most recent quarter.
New CEO Michael Capellas has moved aggressively to slash costs and articulate a new strategy to revive the ailing company. Compaq shares are trading at roughly the same levels that they fetched at the start of 1997 while Dell shares have surged (clearly an understatement) to a recent price of $41 from a split-adjusted $3.20 on January 2, 1997.
Wow!
In its most recent quarter, financial results validated recent initiatives to simplify distribution and focus on profitable businesses. Profits from operations topped forecasts, coming in at $117 million or $0.07 per share. More improvements are on the way as revenue growth resumes and more expenses are eliminated, leading to continued gross margin improvement and operating expense reductions.
In New York on November 10, Compaq announced a new low-cost commercial PC family of appliances called the iPaq. With a starting price of $499 and powered by either an Intel (NASDAQ: INTC - Quotes, News, Boards) Celeron or Pentium III processor, the iPaq is designed as a high quality, low cost Internet appliance and will go on sale early next year.
With this product introduction, Compaq is taking a page out of Apple Computer's (NASDAQ: AAPL - Quotes, News, Boards) highly successful Powerbook by offering only four models to keep down manufacturing and distribution costs. In fact, the iPaq launch may well be a testing ground for initiatives that can be rolled out across all Compaq products over the next year.
For one, iPaq will be built to order with a fast shipping cycle. Translation, lower manufacturing costs and low inventory levels a la the Dell model.
Compaq management has also indicated that they will move to reduce the number of varieties across Compaq's entire product offering to improve efficiencies and reduce inventory as well as ship more product directly to consumers. These are steps in the right direction as Compaq has for too long stayed dependant on its traditional resellers.
I don't want to get ahead of myself. Compaq has a long road ahead as it moves to regain momentum.
Recent initiatives are taking the company in the right direction. With sentiment still very low, I continue to believe that Compaq will surprise on the upside.
Well, what about Y2K?
We can't forget the millennium issue that has wreaked havoc on Compaq competitors IBM (NYSE: IBM - Quotes, News, Boards) and Hewlett-Packard (NYSE: HWP - Quotes, News, Boards).
Compaq has indicated that PC sales are tracking on plan, though server sales may be weak in the quarter. There is clearly an unknown as to what demand will look like in the final weeks of December and early January, but Y2K is a singular event.
Investors will continue to focus on Compaq's future and the ability of CEO Capellas to turn the company around.
I am focusing on the following: Continued operating expense reductions; improved manufacturing efficiencies and higher gross margins; a decisive distribution strategy; and streamlined product offerings like the new iPaq.
Bottom Line:
Continue to expect Compaq to surprise on the upside with relatively modest expectations in the marketplace.
P.s. If your really Are Steinberg incognito. . . I really admire you (Steinberg's wife is the 'hottie' Maria Bartiromo on CNBC)
jaytee
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