A friend passed this on to me concerning CPQ and Dell and I find it very fair evaluation. I would appreciate inputs if you agree.
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*NATIONSBANC MONTGOMERY
COMPAQ COMPUTER CORP. RATING: BUY
October 30, 1997 First Call
COMPUTER SYSTEMS NYSE: CPQ;
Price (10/30 9:30am PST): $63-1/4 FY Ends 12/31 1996 1997E 1998E
52-Week Range: $79-27
Fully Diluted Shares O/S: 792.0 MM Q1 (Mar) $ 0.32 $ 0.53A $ 0.69
Market Capitalization: $50.1 B Q2 (Jun) 0.37 0.60A 0.73
Avg. Daily Vol. (3 mos.): 9.2 MM Q3 (Sep) 0.48 0.71A 0.87
Secular EPS Growth: 20% Q4 (Dec) 0.63 0.83 1.06
FY1998E Revenues: $29.2 B Fiscal Year $ 1.79 $ 2.66 $ 3.35
Market Cap./Revenues: 172% P/E 35.3x 23.7x 18.9x
9/97 Total Debt: $76 MM P/E/G 176% 119% 94%
9/97 LTD/Total Cap.: 1%
9/97 ROAE: 25%
9/97 Shareholders' Eq.: $8.6 B
9/97 Book Value/Share: $10.82
Dividend/Yield: $0.03/0.19%
DELL COMPUTER CORPORATION RATING: BUY
Price (10/30 9:30am PST): $81-1/2 FY Ends 1/31 1997(*) 1998E(*) 1999E
52-Week Range: $103-20
Fully Diluted Shares O/S: 364 MM Q1 (Apr) $ 0.21 $ 0.54A
Market Capitalization: $29.7 B Q2 (Jul) 0.29 0.59A
Avg. Daily Vol. (3 mos.): 9.6 MM Q3 (Oct) 0.39 0.64A
Secular EPS Growth: 45% Q4 (Jan) 0.51 0.71
FY1999E Revenues: $16.2 B Fiscal Year $ 1.38 $2.47 $ 3.25
Market Cap./Revenues: 183% P/E 58.9x 33.0x 25.1x
8/97 Total Debt: $17 MM P/E/G 131% 73% 56%
8/97 LTD/Total Cap.: 1.5%
8/97 ROAE: 80% Calendar Year $ 2.47 $ 3.25
8/97 Shareholders' Eq.: $1.1 B P/E 33.0x 25.1x
8/97 Book Value/Share: $3.10 P/E/G 73% 56%
Dividend/Yield: N/A (*) Adjusted to reflect 2-for-1 split effective 7-25-97.
Addressing DELL and CPQ Concerns
Given this morning's downgrade activity, we think it's worthwhile to re-address some issues of concern surrounding DELL and CPQ:
COMPAQ $62
ASP pressure from $1000 PC: We believe $1K PC sales are incremental, as evidenced by the jump in consumer sales in 3Q, following the $1K PC's launch in late June. (3Q consumer sales and units grew sequentially 78% and 111%, respectively.) Playing in low-end markets should allow CPQ to drive industry consolidation over time, eventually getting it to 20% market share. We addressed these topics in our 10/21 First Call.
Geographic exposure: We noted on Monday that SE Asia accounts for only about 6% of Compaq's sales, likely making the region's problems a minor issue for CPQ's results. More importantly, we believe the company's strong momentum in Europe has continued through October. European sales grew 29% in dollar terms for Compaq in 3Q.
DELL $80
Recent push-outs of component orders: As we noted yesterday, we doubt that this tells us anything significant about Dell's quarter, which ends this week. It's typical for PC makers to delay component shipments at the tail end of their quarters to help the balance sheet. Importantly, our own checks and management's comments during the quarter have been consistently positive.
Longer-term ASP declines may prove steeper than expected: Doubtful based on current trends, including DELL's 2Q ASPs being about flat sequentially and up 4% year-over-year, helped by 300% y-y growth in the server business. Dell doesn't offer $1K PCs, as it is avoiding the
first-time-buyer consumer market. It's doubtful that we'd see so much ASP pressure in the corporate market (70+% of Dell's sales) that Dell couldn't largely offset it with strong server growth, which continues at triple-digit rates. (Note that the company just yesterday introduced server clusters with $60,000-80,000 list prices; this kind of product line expansion goes along way to offset any pricing
pressure in the $2,000 desktop area.)
Tougher competition from increasingly efficient indirect channels: Valid, but our model and consensus estimates already assume sales growth drops to 35% range next year from 60% range seen this year. While growth acceleration probably won't continue (i.e., won't hit 70-80%, up from 67% last quarter), we still see lots of room for continued estimate increases based on what we view as very conservative revenue and operating margin assumptions.
CONCLUSIONS
Reiterate BUYs on CPQ and DELL*. We believe current concerns come from focusing too much on a single negative issue (ASP pressure from the $1,000 PC) at the expense of the positive bigger picture, including rapid growth of high-margin servers at both companies and incremental nature of $1,000 PC market for Compaq. |
