More news to come... Note the comparison to intel!!!
K.
CPQ: Lowering PC Industry Forecast for FY98 from 18% growth to 15%; Believe CPQ should continue to gain market share; No change in estimates; Unit growth currently running at 70% y/y; Reiterate Buy
03:41pm EST 9-Dec-97 BancAmerica ROBERTSON STEPHENS (Niles, Daniel)
KEY POINTS:
* Based upon current economic conditions in Asia, specifically Japan and Korea,
which appear will last at least through 1998, we are lowering our
industrywide PC unit forecast for FY98 by three percentage points from 18%
growth to 15%. We estimate Asia Pacific and Japan combined will likely
account for 23% of total PC unit market share in FY97, which is a substantial
amount and therefore the reason for our reduction. Compaq however, has
roughly 6% of revenues from Asia Pacific and only 3% from Japan. On the
bright side, PC unit sales in the United States and Western Europe, which we
estimate will account for 61% of total PC market share, continue to remain
strong. In fact, Western Europe appears to be running slightly ahead of plan
as the commercial market in that region continues to improve. North America
and Europe account for roughly 86% of Compaq's revenues.
* Unlike Intel, whose revenues are one-for-one related to PC unit growth, we
believe Compaq will continue to prosper even in FY98 although we have reduced
our PC industry unit growth forecast. This is due to the fact that as the
largest PC company in the world, Compaq is able to utilize its volume
capabilities in order to produce the lowest cost PC in the market today. In
addition, the company's transition to the BTO/CTO model is enabling a
dramatic reduction in distribution costs, making the company more competitive
with direct vendors. Furthermore, the company's new BTO/CTO initiatives
should reduce inventory in the channel and allow the company to better gauge
the worldwide PC supply/demand scenario.
* Our recent checks indicate that Compaq's business continues to prosper in the
fourth quarter. According to the company, PC unit growth increased in the
low 70% range on year over year basis in the month of October with similar
momentum continuing in the month of November. Although December is the
largest month of the quarter, albeit the shortest, we feel very comfortable
with our estimate of 56% y/y unit growth for Q4. Given current y/y run
rates, we feel comfortable that our 34% estimate for FY98 is conservative.
* Although we have lowered our overall PC industry forecast, we are not
changing our estimates on Compaq at this time. We believe our estimate of a
$2,300 ASP for FY97, declining roughly by 7% to an estimated $2,175 for FY98,
should be offset by a 34% increase in overall units shipped over the same
time period. Furthermore, Compaq, which ended Q4 1996 with 10.5% of the
total worldwide PC market has expanded its market share to 13.6% at the end
of Q3 1997. We believe its market share will continue to grow to more than
15% market share in 1998 at the expense of others and likely provide upside
to our FY98 EPS of $3.45. In 1997, the PC unit forecast declined throughout
the year from roughly 20% to 16%, but Compaq has continued to grow faster
than the industry and gain market share. We believe we will experience a
similar scenario in 1998, and while PC unit forecasts will be lower than
expected, we expect Compaq to continue to grow at much faster rates than the
industry.
RATING: We rate Compaq as a Buy.
THE COMPANY AND INVESTMENT THESIS: Compaq Computer Corporation is the leading
brand name in the manufacture of servers, desktop, and portable personal
computers. Compaq and Microsoft Corporation have partnered to establish
standards for the world computing market. Compaq's products are sold and
supported in more than 100 countries through a network of more than 30,000
marketing partners. During the past several quarters, Compaq has gained
substantial market share while keeping expenses under tight control. With
added production capacity and a positive reception to new products, the company
has the ability to continue its top-line growth while continually expanding
profitability.
INVESTMENT RISKS: Among the risks are the ever-present fear of a decline in
demand. Historically, this has resulted in price wars aimed at holding market
share and alleviating rising inventories. In turn, these pricing moves have
led to significant industry losses. |
