Another report, this time from DLJ Securities, hope it is not a repost:
COMPAQ COMPUTER CORP.: A Revolutionary New Distribution Model
02:00pm EST 11-Nov-98 DLJ Securities (Kevin A. McCarthy)
Range: Earnings Per Share 1998 vs 1997 % Chg
39-23 Old New P/E Ratios F1QA $.01 vs .27 -96%
(FY:Dec.) 1999E $2.00 $ 17.0 F2QA .02 vs .30 -93%
1998E .47 72.3 F3QA .07 vs .35 -80%
1997A 1.34 25.4 F4Q .37 vs .42 -12%
Yield: 0.2% Market Cap.: $59.1B 5-Yr. Growth Rate: 20-25%
Dividend: $.06 Avg. Trading Vol.(000): 10000 Book Value: $6.78
RATING: Top Pick Change: None 12-Mo. Target: $50
VIEWPOINT
Compaq announced a revolutionary new distribution and product model for
small and medium businesses (SMB). ProSignia notebooks, desktops and
servers will be offered direct through an 800 number and Compaq's revamped
Directplus Web site as well as through existing resellers. The ProSignia
products represent a major change in the company's competitive stance in
distribution of PC technologies and services. Compaq believes its Customer
Choice model, in which the customer decides the manner in which they
procure products, will ultimately prove more successful than an exclusively
direct or exclusively indirect distribution model. Compaq's stock has been
penalized by the perception that the company's indirect distribution model
is inefficient and leads to slower asset turns, returns on capital and
returns on sales. The Customer Choice distribution model will serve as the
catalyst for improved asset and profit returns, in our opinion. CPQ stock
trades around 17x '99 earnings versus IBM 21x, HWP 20x, GTW 22x, MEUI 28x,
and DELL 50x. We believe CPQ's multiple will expand to at least 20x in the
near term and expect the stock to reach $40 by the end of this year. Our 12
month price target remains $50.
KEY POINTS
ProSignia is a new comprehensive product line of notebooks, desktops and
servers which will be sold to the SMB market. The SMB market represents 30%
of the total PC business and is the fastest growing segment in the
commercial market. The SMB market is highly fragmented and is served
primarily by the "white-box" product offerings. CPQ is taking a proactive
stance in attacking this lucrative market.
ProSignia will be price at or below competing direct product offerings. The
company demonstrated several examples today where ProSignia, comparably
configured, is priced below offerings from Dell, Gateway and Micron
Electronics. Compaq has lost share in recent years to the direct suppliers
due in large part to the pricing advantaged offered by direct suppliers.
ProSignia closes the gap and in most cases goes below direct pricing. Cycle
times on ProSignia will allow CPQ to deliver the product within 5 days of
order, competitive with the direct model.
ProSignia will also offer a host of service options targeted to small
businesses. On-line backup and Internet access are a few of the services
offered. Compaq will also provides very competitive leasing options on
individual products or a collection of products and services.
Compaq will offer ProSignia through resellers but resellers will receive no
price protection or return privileges. Resellers, which do not want to take
the inventory risk, can receive an agency fee of 6-8% for referring
customers to CPQ for direct shipment. We believe the channel will
ultimately evolve into an agency model where all hardware is shipped direct
and the channel provides follow-up support and services. The channel
already acts in this capacity with commercial customers who buy Dell
Computer products direct.
Skeptics will doubt CPQ's ability to manage both a direct and indirect
product strategy. We believe a hybrid distribution model is not only
managable but reflective of market trends which exist today. According to
market researchers, 65% of all PCs are sold through distribution channels
and 35% are sold direct. Since CPQ wants to appeal to the total market the
company plans to replicate that mix within its own distribution strategy.
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