Zalesky.... "Momentum money is finally coming out of Compaq and flowing into good old Dell." The Wall Street Journal disagrees. El
Compaq's Share Price Rises
As Dell's Stock Begins to Ease
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
Here's a tip for investors who are still fuming about Compaq's
transgressions against shareholders earlier this year: Get over it.
Compaq has been scoring big with investors lately, while archrival Dell
Computer's popularity in some quarters of Wall Street has fallen. Shares of
the two stocks reflect the shift in Compaq's favor. Compaq's shares have
jumped from 32 on Dec. 1 to a close of 40 1/16, while Dell shares have
slumped recently, falling from a high of 73 1/2 in early November to a
close of 67 5/16.
What has changed? Some believe
that, while Dell's market may be on
the verge of saturation and its
earnings-growth rate may begin to
slow, Compaq may be on the verge
of generating earnings growth in the
Dell-like range of 45% to 50% as it
charges into the direct-sales market
where Dell has, until now,
dominated.
If Compaq does turn out the kind of
earnings growth some investors are
predicting, its stock could have much
higher to go, particularly since its shares trade at a market multiple of only
about 24 times consensus earnings for 1999 of $1.76. Dell, on the other
hand, trades at closer to 40 times next year's earnings.
This week, PaineWebber analyst Don Young increased his price target to
$62.50, adding in a note to clients that if Compaq pulls off its strategy for
direct marketing of its personal computers, a la Dell, its stock could reach
between $85 and $100, based on a 35-to-40 multiple of his estimate for
1999 earnings.
And, unlike shares of Dell, which reflect investors' belief that it will keep
turning out 50% earnings growth, expectations for Compaq are lower.
That should work to its benefit. "The bar is set so low for Compaq, it
should be like a baby step to clear it," Mr. Young said.
To be sure, Compaq isn't yet out of the doghouse with investors. Its
credibility has been suffering since the end of its March quarter, when an
excess inventory at Compaq's distributors caused it to miss quarterly
earnings expectations. The problem was a big sore spot with investors,
since management had denied the problem for months, saying it was
bringing inventory levels down, when the opposite was true, Mr. Young
said.
"A lot of people don't know if they trust what the company is saying these
days. That's what I hear from a lot of clients," said Mr. Young, who now
believes the company is again walking the straight-and-narrow with
investors.
Some hedge-fund investors who have recently bought the stock say they'll
hold on until Compaq reports its fourth quarter, which is generally
expected to be good, and then sell the stock. One hedge-fund manager
said, "I'm not going to hang around for long to find out if they've really
reformed."
But, there is again a growing band of believers in Compaq's stock. "For the
short term, at least, they are going to make their earnings number and their
revenue number and they're doing the right thing," said Huachen Chen, an
analyst at money-management firm Dresdner RCM.
The stars have lately aligned in Compaq's favor. It helps Compaq, and the
rest of the industry, that demand for computers was stronger than expected
at the end of the third quarter, partly because of stronger-than-expected
demand in Asia, particularly Japan. Spending for the year 2000 is also
driving demand for upgrades, analysts say. Both trends are expected to
continue in the fourth quarter.
But the biggest boost to Compaq came earlier this month, when Compaq
visited Wall Street, outlining its direct-sales strategy. For now, Compaq is
concentrating on the small and midsize business market, where it will try to
sell computers via the Internet and telephone.
Growth potential for the small-business market is considered greater than
that for the large corporate market, which some consider saturated.
Indeed, some analysts say the beginnings of a slowdown are turning up in
Dell's results. In its last quarter, Dell fell slightly behind the overall market
rate of growth in several of its businesses.
Sales in Dell's desktop business, for instance, grew 8%, compared with the
previous quarter, while world-wide that business grew 10%
quarter-to-quarter, Piper Jaffray analyst Ashok Kumar said. "Dell
underperformed relative to the market-growth rate, and its traditional base
of large and medium-sized businesses is saturated," he said.
By comparison, PaineWebber's Mr. Young said, Compaq could grow by
40% if it captures the same 19% market share in the direct market that it
commands in the indirect market.
|
