Thread: Before I dash off, here is Steve Fortuna's complete report on CPQ. Normally I only post the highlights, but today I'm posting the whole thing. The bold line is in the original:
"Compaq Computer Corp: Keep the Faith:"
Steven M. Fortuna, First Vice President
Michael Hillmeyer
Melanie Hollands
Reason for Report: Analysis of Earnings
ACCUMULATE Long Term: ACCUMULATE
Price: $20.05
12 Month Price Objective: $24
Estimates (Dec) 1999A 2000A 2001E
EPS: $0.29 $0.96 $1.05
P/E: 68.3x 20.9x 19.1x
EPS Change (YoY): 231.0% 9.4%
Consensus EPS: $0.96 $1.17
(First Call: 02-Jan-2001)
Q1 EPS (Mar): $0.16 $0.18
Cash Flow/Share: $0.45 $1.11 $1.48
Price/Cash Flow: 44.0x 18.1x 13.5x
Dividend Rate: $0.08 $0.08 $0.08
Dividend Yield: 0.4% 0.4% 0.4%
Opinion & Financial Data
Investment Opinion: B-2-2-7
Mkt. Value / Shares Outstanding (mn): $35,061.6 / 1,769
Book Value/Share (Dec-1999): $8.58
Price/Book Ratio: 2.3x
ROE 2000E Average: 10.0%
LT Liability % of Capital: 0.0%
Est. 5 Year EPS Growth: 15.0%
Stock Data
52-Week Range: $35.00-$14.30
Symbol / Exchange: CPQ / NYSE
Options: Pacific
Institutional Ownership-Vickers: 56.5%
Brokers Covering (First Call): 21
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: In Line (25-Oct-2000)
Growth: In Line (25-Oct-2000)
Income & Growth: In Line (25-Oct-2000)
Investment Highlights:
Compaq reported 4Q00 revenue of $11.53
billion (up 10% yr/yr) and EPS of $0.30,
beating our forecasts of $11.43 billion and
$0.28. We are keeping our 2001 forecast for
revenue growth of 7% (to $45.32 billion) and
EPS of $1.05. We are, however, lowering our
1Q01 earnings forecast to $0.18 from $0.22 to
reflect our concern regarding the first half of
2001.
We have been saying for some time now that
investors should focus on the global,
diversified and corporate names in the PC
Hardware universe (e.g., Dell & Compaq)
even as most of our competitors downgraded
the entire group and wrote it off for dead. We
have, in fact, viewed Compaq and Dell as
defensive value plays since the end of last year.
We continue to believe that both of these
stocks remain very attractive investments in
the technology space for this year. We
reiterate our Accumulate rating on Compaq
shares.
Inventory was 3.9 weeks in the corporate
channel and 4.3 weeks in the consumer
channel. We continue to believe that Compaq
has a huge untapped opportunity to reduce its
order cycle turnaround time & corporate
channel inventory to the 2 week level.
We Said, "Keep the Faith"
Last night Compaq reported 4Q00 revenue of $11.53 billion
(up 10% yr/yr) and EPS of $0.30, beating our forecasts of
$11.43 billion and $0.28. We are keeping our 2001 forecast
for revenue growth of 7% (to $45.32 billion) and EPS of
$1.05. We are, however, lowering our 1Q01 earnings forecast
to $0.18 from $0.22 to reflect our concern regarding the first
half of the year. We see Compaq’s product revenue growing
by 7.7% to $$38.4 billion with service revenue rising by 3.1%
to $$6.9 billion.
We have been saying for some time now that investors should
focus on the global, diversified and corporate names in the PC
Hardware universe (e.g., Dell & Compaq) even as most of our
competitors downgraded the entire group and wrote it off for
dead. We have, in fact, viewed Compaq and Dell as defensive
value plays since the end of last year, and both stocks are up
impressively by 33% and 51% year to date respectively. We
continue to believe that both of these stocks remain very
attractive investments in the technology space for this year.
We reiterate our Accumulate rating on Compaq shares.
Inventory in the corporate channel was 3.9 weeks while in the
consumer channel it was 4.3 weeks. We continue to believe
that Compaq has a huge untapped opportunity to reduce its
order cycle turnaround time and corporate channel inventory
to the 2 week level. In our opinion, this could prove an
additional efficiency boost for the Compaq model this year.
Compaq’s Enterprise Computing segment posted strong sales
of $4.11 billion (up 20.0% yr/yr, 35.7% of mix) with an
operating profit of 17.6% vs. 15.7% in 3Q00 and 12.8% in
4Q99. We were especially impressed with Compaq’s Wintel
server growth in light of the obvious pricing pressure by the
competition. Wintel servers were up 24%, Business Critical
servers rose 17% (Alpha & Himalaya), and Storage Products
also grew 17%. We think Compaq’s dominance of the 4-way
and 8-way server market (60% market share in 8-way), helped
to shield the company from the ill effects of pricing pressure
for Wintel servers during the quarter. Alpha continued to
benefit from a strong upgrade cycle. Total revenue from the
new line of servers (Wildfire) reached $800 million by the
end of 4Q00 with an additional $200 million in sales expected
in 1Q01. It is too early to determine whether Alpha servers
will enable Compaq to significantly expand its share of the
Unix server market. Himalaya’s strong growth was largely
the result of solid demand from telecom and financial
customers. Wintel unit growth was lower than revenue growth
due to more higher-end servers in the mix. Importantly, one
third of Wintel servers are now shipping with Windows 2000.
External storage grew 50% yr/yr, well ahead of expectations,
and now makes up 35% of Compaq’s storage business, up
from 26% last year. External storage consists of external
direct attached storage, SANs, NAS, high end tape, and
software (up 130%). The company cited improved customer
acceptance of its external storage products as well as its SAN
strategy. Clearly Compaq’s strength in its enterprise server
business, particularly in 4-way and 8-way Wintel, Alpha, and
Himalaya significantly contributed to the good storage
performance. Currently, 46% of Compaq’s Wintel servers
sold require external storage.
Compaq Global Services sales fell in the quarter to $1.8
billion (down 4.8%, 15.7% mix) with an operating profit
margin of 13.3% vs. 15% in 3Q00 and 14.5% in 4Q99.
Performance here was somewhat disappointing, although
understandable in light of weak corporate demand. We
believe that the company needs to focus more on building out
the professional services side as well as developing more of a
brand image around the entire services offering. We
anticipate a better growth rate in the second half of the year
with better utilization rates and gross margins.
The Commercial Personal Computing segment turned in sales
of $3.47 billion (up 10.9%, 30.1% mix) with an operating
profit margin of 3.3% vs. 4% in 3Q00 and a loss in 4Q99.
Notebooks were the key growth driver here, up 27% yr/yr.
Compaq had made marked strides in improving its profit
model in its commercial division owing to more direct and
partner-direct sales and a robust , streamlined product line.
Compaq continues to focus on profitable growth in this
segment rather than merely on unit growth. Compaq will
walk away from business where it is being overly pressured
by the competition. We envision growth in the low teens next
year with revenue in the low single digits.
Consumer revenue was $2.03 billion (up 3.5%, 17.7% of mix)
with a small operating loss vs. an operating profit margin of
3% in 3Q00 and 3.5% in 4Q99. This was not a bad
performance in light of the tremendous pricing pressure
brought on by weak demand. The company essentially broke
even , but we are hopeful that ramping high-margin iPAQ
sales and some demand rebound in 2H01 could restore this
business to solid sales growth rates and profit levels.
On a geographical basis, Compaq is benefiting from its broad
global diversification and non-US revenues tend to be more
high-end weighted. North America grew 10% and now
makes up 46% of Compaq’s revenue mix. Europe was up 3%
(up 22% in constant currency, up 21% in 3Q00) and is 36% of
the mix while the rest of the world grew a very strong 27% to
reach 18% of the mix.
Lynn |
