Standard & Poors Rating: Four Star (****) Accumulate
<< OVERVIEW 27-JAN-00 >>
Revenues are projected to grow roughly 15% in 2000, following a difficult 1999 that was penalized by
weak results in the company's commercial PC line. However, Compaq's consumer PC line has been
witnessing strong growth, and we see strength in that division and in the company's high-end
computing division, both buoyed by new product offerings as well as robust secular demand tied to
the buildout of the Internet's infrastructure. We expect gross margin expansion to remain limited by
pricing pressures, but we see improvement through the year, to nearly 26% by the fourth quarter,
versus 1999's depressed 23%, aided by new distribution strategies aimed at reducing inventories
coupled with opportunities to grow non-PC revenues which carry healthier margins. Our 2000 EPS
estimate is $1.15, compared with $0.29 in 1999, excluding a net gain of $0.01 in the third quarter,
and an investment gain of $0.03 in the fourth quarter.
<< VALUATION 27-JAN-00 >>
We recommend accumulating CPQ. Although CPQ's results were largely disappointing in 1999, we
believe this reflects challenging but much-needed changes undertaken over the past year: the DEC
acquisition (the largest in computer industry history), and the launch of direct sales capabilities.
While the benefits of the merger have proved illusory, we believe CPQ is better positioned as a result.
Through DEC's global sales and service capabilities, CPQ can serve growing corporate demand for
complete solutions. At a recent P/E, based on our 2000 EPS estimate, that is below the market
multiple (using the S&P 500), we believe CPQ's valuation does not reflect its leadership position, nor
our belief that new CEO Michael Capellas can execute a turnaround strategy. |
