Uncle Frank & All, here's some news that not very good for Dell...
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. Youngsaid.
"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 hedgefund
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. Copyright (c) 1998 Dow Jones & Company, Inc.
Comments? Time to sell Dell and buy CPQ?
Stock Bull |
