Riechers: Steve, I think the divergence from the DELL-CPQ pattern of the last year has fundamental causes.
First, the matrix problem has been the merger. Although not proven yet, indications are growing that it will be proven accretive soon, within two quarters, maybe in this quarter. WS is beginning to understand the story. So all the discounts that the p/e merchants were applying with respect to the merger, qua merger, are being relaxed, if not removed.
Then, there is the inventory problem. Through dint of sheer repetition, as well as last quarter's report, conviction is growing that the inventory problem is fixed. Discount on the p/e applying to that are being relaxed, but are not yet removed.
We are then left with the perception of CPQ having an inferior business model - indirect versus direct. This week has shaken those assumptions. The CPQ created an "applet" which is now embedded in the collective memory of Wall Street. Over and over again you will hear references to Compaq's adoption of the direct model and its new competitiveness with DELL. The story will be simplistic and bastardised but it will change the perception of Compaq. In the process, the Street will grow more appreciative of the nuances of the story.
That brings us to share price. DELL has been awarded a huge p/e because it is perceived as having the perfect business model, a universe of clumsy competitors into whose market it can expand infinitely, and benign business conditions, including deflation in Asia which provides cheap components but which does not hurt DELL's sales, since sales in Asia were always a small part of its total revenues. DELL has also lulled WS into believing that it will always meet and exceed its numbers and its whisper numbers by a comfortable margin.
CPQ has been awarded a meagre p/e for all the reasons I have mentioned.
Almost all the factors, for DELL and for CPQ, are changing. The bottom line is that DELL's p/e will shrink and CPQ's will expand. The process will be gradual and hesitant for a few weeks, but will jump significantly as news emerges. When CPQ hits its stride and has this and next quarters results under its belt, and as the next twelve months becomes more visible, the p/e might expand to 30, as I expect it will by September, 1999. Since I also expect this year to be at least $2 per share, probably $2.50 then you can see why I am optimistic for a price during next year of at least $60.
I realise that CPQ has been a trading stock and returns to the $20's with depressing regularity, as Elwood says. In my view, it could happen again only if there is a drastic downtown in the entire market - which I do not expect. All those trips up and down have built a base. Notice how quickly it has rebounded from the last fall. Eventually it has to move away from that trading range. I thought it would happen in the 3rd week of Novemeber because it will be pulled forward by seasonal sales news and by anticipation of earnings of at least 0.37 p/s but, in my estimation, more like 0.41 cents p/s or better. I think the recent move down is a pause, but the upward momentum will resume, perhaps next week.
Victor
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