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Technology Stocks : Compaq
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To: Elwood P. Dowd who wrote (38572)12/4/1998 11:57:00 AM
From: David E. Taylor  Read Replies (2) of 97611
 
Looks to me like the run up in CPQ over the last few days is simply
the result of the market assigning a more "reasonable" valuation to
CPQ based on projected forward earnings:

1999 EPS Share Price Forward P/E Growth
(Estimated) (Current) (Est)

IBM 7.49 168 22.4 14%

DELL 1.45 66 45.0 31%

CPQ 1.76 38 21.6 20%

Assign an IBM P/E to CPQ's projected 1999 earnings, and you get about
$39/share. Factor in the higher estimated growth rate and you get
about $41-$42/share. That's about where we seem to be headed, as long
as the general markets hold up.

Further progress beyond the $39-$42 level would seem to depend on
either:

(1) Momentum investors blowing the price beyond the level supportable
by the present earnings/growth projections, which could take us just
temporarily to the $45-$50 range pretty quickly; or

(2) The street's earnings estimates being revised upwards based on
CPQ demonstrating through its Q4 1998 (and then Q1/Q2 1999) earnings
that it is successfully using the DEC acquisition to eat into the
IBM/HWP/SUNW enterprise market to sustain an earnings growth rate well
in excess of the presently estimated 20%. If this happens, CPQ will
settle onto a new base level at $45-$50 and move up from there.

IMO, (1) is certainly possible, but in any event (2) will take place
over the next couple of quarters.

David T.
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