09:52 ET Compaq (CPQ) 15.79 -0.11: Expect a lot of research from the brokerage houses on potential misses now that the end of JunQ is in sight.
Merrill Lynch met with Compaq management and described them as enthusiastic and optimistic regarding the company's strategic
positioning while employee morale remains solid. As for JunQ, the firm expects CPQ to make its EPS estimate, however, there could be
some risk to its product revenue forecast of $7.4 bln due in part to Compaq's ongoing reductions of inventory levels which could lead to
reduced sell-in to the channel....If this is the case, Briefing.com would not expect CPQ to pre-announce. Times for tough for Compaq. PC
sales remain anemic and are slowing. Dell, which recently pushed past Compaq to become the world's largest PC producer, has been
slashing prices to take share from its rivals. Couple the price wars and sluggish PC industry growth rates and you get increasing pressure on
gross margins causing a drain on the company's cash. That spells bad news for CPQ and the others as analysts have been slashing
estimates. Also, Compaq's foray into the enterprise hardware market is also weighing on the shares as IT spending on storage has also
slowed. However, at least with the latter, the money is there for the IT budgets, companies are just holding back on spending it. The PC
market should improve next year. The general consensus is for flat sales this year followed by mid-teen growth next year. But our sense is
that number could come down....In sum, we believe Compaq is near a bottom as much of the bad news has been priced in. If the stock
were to break $14/15, we would head for the hills and wait it out as that is a key support level. Also, P/E even here is high at 28x.
Briefing.com continues to expect Compaq to be confined to a trading range as there is little in terms of a near term catalyst for the shares. --
Robert J. Reid, Briefing.com
17:49 ET ****** 01-Jun-01
Weekly Wrap : While the Memorial Day holiday was a welcome respite from the daily grind, investors didn't have long to enjoy it because
the market opened on Tuesday with an air of uncertainty about it. Had the rally from the April lows been warranted? Were stocks
over-extended? What would be revealed as we entered the tumultuous earnings warning period, and more importantly, which companies
would be revealing disappointing news? There were no bombshells dropped during Tuesday's session, but the Nasdaq suffered a
noticeable setback anyway as investors braced for the mid-quarter update from Sun Microsystems (SUNW) after the close.
As it turned out, they were right to be nervous. SUNW issued a fiscal Q4 earnings warning, and in disturbing fashion, indicated that
demand in Europe tailed off more than expected. The latter was a caustic statement as it fueled concerns of a U.S. contagion effect abroad,
and created misgivings about an economic recovery, and a subsequent earnings rebound, occurring before the end of the year. Those
doubts prompted a broad-based selloff that was accented by a 4.2% decline in the Nasdaq.
Aside from the disappointing news from SUNW, investors were also thrown for a loop when Morgan Stanley downgraded several telecom
equipment stocks, driven by a concern that capital spending may not ramp again until Q3 2002. Although there were no major warnings
between Wednesday's close, and Thursday's open, there was another round of cautious comments from Wall Street brokerages Thursday
morning, replete with EPS reductions for the likes of Compaq (CPQ), Oracle (ORCL), Altera (ALTR) and Xilinx (XLNX).
On the heels of Wednesday's selloff, and confronted with those gloomy earnings forecasts, all the market did on Thursday was trade
higher. It was at that point that the bulls wrested control of the action from the bears, driven by a sense that the risk-reward ratio is tipped
in their favor now that the Fed has cut rates by 250bp. Needless to say, when Novellus Systems (NVLS) reaffirmed its Q2 earnings
forecast after the close, the bulls had reason to feel vindicated in their view that the worst has passed in terms of earnings disappointments.
Or did they? The May employment report turned out to be slightly better than expected, highlighted by a 0.1% decline in the unemployment
rate to 4.4%. After hearing a litany of layoff announcements in recent weeks, that headline seemed like an aberration, but alas, it was true
and it triggered a rally in the equity market. Hot on the heels of the jobs data, though, was the NAPM Index which told a vivid story of
continued weakness-- nay recession-- in the manufacturing sector, as it fell to 42.1% from 43.2% in April, suffering a setback after three
months of very modest improvement. Again, the market had reason to question the likelihood of an economic rebound before the end of
the year, but instead, it focussed on the likelihood that the Fed would continue to cut rates.
In doing so, the market was able to close the week on a winning note. If there was one noticeable drawback, it was the lack of volume on
Friday which left the conviction of buyers in question. Nevertheless, despite the losses in the major indices, the market's bullish bias was
apparent again this week as it was able to digest bad news without much damage. What one needs to remember, though, is that there was
still some damage done, and with the market well aware that the corporate news cycle is likely to be highlighted by negative news for the
next few weeks, Briefing.com thinks investors should be cognizant that gains will be harder to come by for the time being. Accordingly, a
prudent course of action now may be to take some profits off the table in anticipation of the market getting spooked by bad earnings news,
but at the same time, recognizing that the Fed's easing actions will make buying on material dips a more rewarding proposition than it has
been in the past year.-- Patrick J. O'Hare, Briefing.com |
