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STREET WISE
By Sam Jaffe
A Tech Turnaround? Start with Compaq
At $19, the computer giant's stock is tempting those who believe its fundamentals are solid and the worst news is behind it
If technology stocks lacked a bellwether, they have one now in Compaq (CPQ ). The Houston-based giant sells more computers to businesses every year than any other computermaker in the world. Its revenues are enormous. Sure, Compaq's growth has atrophied, but it continues to turn a profit even as the economy slows. So hear me now: Where Compaq's stock goes from here, so goes the Nasdaq. I think the direction will be up.
Yes, the landscape does look very bleak. "Right now, things are blindly bearish in the Nasdaq," says Commerzbank equity strategist Michael O'Sullivan. Once-chipper tech-stock cheerleaders have fallen strangely silent or have thrown in their lot in with the pessimists. When was the last time tech guru George Gilder was quoted in the financial press as hailing a fiber-optic stock? Even James Cramer of TheStreet.com has taken to broadcasting bearish nostrums in his online column, opining that there's nothing to drive tech stocks higher.
Don't buy all gloom and doom, especially when it comes to Compaq (see BW Online, 3/6/01, "Not the Compaq We Used to Know"). The wisest investing maxim ever uttered is said to have come from Nathan Mayer Rothschild, who advised: "The time to buy is when blood is running in the streets." While blood isn't literally flowing in Silicon Valley (many a burned tech investor would regard that as unfortunate), it's hard to believe sentiment could get any worse.
"FINAL HEAVE." But that's actually a very good thing. We have reached, as Lehman Brothers chief strategist Jeffrey Applegate calls it, "the final heave," the sound of the last bit of hope being extinguished before the heavyweights of the market completely capitulate. That's when small investors can make major gains.
Which brings us to Compaq, now trading at just under $19 a share, about 47% off its 52-week high of nearly $35. This is a company that sold $42.4 billion worth of computers last year. Yet its market capitalization is only $30 billion. Simple stated, the stock is cheap. When you look at earnings estimates going forward, it has a price-earnings ratio of 13.8, based on the earnings consensus tracked by Thomson Investors Network.
For a company that's still widely expected to increase earnings 15% a year, that's a bargain. Not everyone agrees. Of 19 analysts who track the company, five rate the stock a strong buy, while six rate it a hold. The other eight give it a lukewarm buy recommendation. The chief optimist among Compaq analysts is Prudential's Kimberly Alexy. In the midst of downward revisions by her colleagues, Alexy recently issued a strong buy recommendation. "Most of the bad news is already reflected in this stock," she says. She sees positive things ahead for this computer giant.
DOWNRIGHT DEPRESSED. The most important factor may be the company's continuing migration toward a direct-sales model, rather than distributing its machines through resellers. After suffering repeated market-share contractions at the hands of Dell (DELL ), its main competitor, Compaq, under the leadership of CEO Michael Capellas, has adopted the goal of selling more than half its products directly to customers. That strategy, along with its resulting cost savings, is right on target, says Alexy.
True, no one is predicting the kind of heady growth Compaq experienced in the '90s. All the same, the company is starting to sell new machines to existing customers intent on upgrading to the Windows 2000 operating system or to Intel's new IA 64 processor structure that allows for more powerful servers.
On the negative side is legendary Lehman computer analyst Dan Niles. Long considered one of the smartest and most knowledgeable of the industry's observers, Niles is downright depressed by what he sees when he looks at Compaq's stock price. "We continue to recommend that those that do not have to invest in technology -- don't," Niles writes in a recent report on Compaq.
SILVER LININGS. Niles' concern doesn't rest with management: Capellas appears to have put a listing ship on an even keel during his two years at the helm. Nor does Niles fault the company's products. It is simply that North American businesses aren't buying computers like they used to. All three levels of Compaq's core computer business -- servers, notebooks, and desktops -- are suffering sales slowdowns, a trend that has led the company to lower its sales estimates for the first quarter, from $9.6 billion to somewhere between $9 billion and $9.2 billion. In addition, earnings estimates dropped about a third for the quarter, to between 12 cents and 14 cents a share.
Why do these numbers upset Niles? Isn't he comforted to note that Compaq is still making a profit? Where Niles sees thunder clouds, Alexy spots silver linings -- and I think she's onto something, not just in regard to Compaq, but about the tech sector in general.
The main reason why Alexy likes Compaq is its stock price, which hasn't fallen nearly as much as some of its tech compatriots. With the most recent revision of earnings estimates, she thinks the worst is over and "the risk/reward is favorable." In short, there's blood on the streets. If Rothschild were alive today, he would be grinning at his computer screen -- and getting ready to buy some tech stocks with strong fundamentals.
Jaffe writes about the markets for BusinessWeek Online in our daily Street Wise column
Questions or comments? Please visit our Ask Sam Jaffe interactive forum
Edited by Beth Belton |
