And more news... These guys seem to feel that the 'channel problem' is not a problem
K.
CPQ: Buildup Of Inventory Levels In U.S. Distribution Channel
01:50pm EST 11-Dec-97 Credit Suisse First Boston (Wolf, Charles)
OPINION:
BUY / FOCUS LIST
Compaq Computer (CPQ)
Summary
The buildup of inventory levels in the U.S. distribution
channel chiefly reflects promotional sales associated with
Compaq's move from a build-to-inventory to a build-to-order
model rather than a weakness in demand. Maintaining 1997 and
1998 estimates and a 12-month price target of $87.
Price Target Mkt.Value 52-Week
12/10 (9 Mo.) Div. Yield (MM) Price Range
$60 $87 None $47,358.0 79 9/16 - 28 3/8
Annual Abs. Rel.
EPS P/E P/E
12/98E 3.45 17.4X 87%
12/97E 2.70 22.2 103%
12/96A 1.88 31.9 128%
March June Sept. Dec. FY End
1998E .74 .78 .91 1.03 Dec. 31
1997E .54A .58A .72A .86
1996A .30 .39 .52 .62
ROIC (9/97) 43.5%
Total Debt (9/97) $0m
Book Value/Share (9/97) $9.63
WACC (9/97) 12.7%
Debt/Total Capital (9/97) 0%
Common Shares 789.3 mil.
EVA (Trend) Up
Est. 5-Yr. EPS Growth 17%
Est. 5-Yr. Div. Growth NA
1On 12/10/97 DJIA closed at 7978.79 and the S&P 500 at 969.79.
Compaq Computer Corporation, a Fortune 100 company, is the
fifth largest computer company in the world and the largest
global supplier of personal computers.
Summary and Investment Recommendation
Concern has grown that demand for Compaq's products in the
U.S. business market are not meeting the company's internal
forecasts because inventories in the U.S. business
distribution channel have risen from their September levels.
With the move from a build-to-inventory to a build-to-order
manufacturing and distribution model, Compaq predicted that
inventories would fall by the end of the quarter. This now
appears highly unlikely.
Overall channel inventories have risen about a week since the
end of September to around six weeks of sales world-wide. To
place this in perspective, inventories were about twice as
high a year ago.
A number of distributors have noted that Compaq has recently
offered them products at promotion prices, which are typically
a percent to a percent and a half below listed wholesale
prices. Our interpretation-confirmed by the company and one
corporate reseller-is that Compaq is mostly blowing out old
inventory manufactured under the build-to-inventory model to
clear the channel for new products manufactured under the
build-to-order model. As evidence that the promotions are not
demand related, in the past, vendors typically engaged in
promotions in the last week of a quarter to "make their
numbers". Since Compaq still has three weeks to go before
they close their books on the year, we believe that the
promotions are unlikely to be part of a conspiracy to "stuff
the channel".
Compaq began the roll-out of its build-to-order model in July
on three desktop models. But it completed the transition to
all products in the U.S-from notebooks to servers-just in the
past week. It should be noted this applies only to the
business market. Products sold through retail outlets to home
buyers have and will continue to be manufactured on a build-to-
inventory basis.
In our opinion, the real problem stems from Compaq's guidance
earlier this year that as the build-to-order model rolled out,
channel inventories would fall, not rise. We regard such
guidance as naive, especially within the context of the
obvious transitional issues noted above and the traditional
seasonal buildup of inventories in the December quarter. What
appears at stake more than the inventory issue is the
credibility of the company in this regard.
The key point to remember is that the inventory buildup is not
a demand problem. Demand for Compaq's products remain strong.
The company noted that sales of high end, high margin servers
and workstations are especially strong and that European sales
are the strongest in two years. Although the company did not
cite consumer sales, these also appear to be booming,
according to independent sources.
Recent events do point out that moving from a build-to-
inventory to a build-to-order manufacturing/distribution model
is not a trivial exercise. It requires a complete
reengineering of the supply chain. And it requires a new
buying psychology among vendors, dealers and customers. We
anticipate that by mid-1998, most if not all of these
frictional issues will be resolved when the build-to-order
transition is completed worldwide.
We continue with 1997 and 1998 earnings per share estimates of
$2.70 and $3.45 respectively. |
