Hmmmm, complimented by the ladies on the thread AND
breathing fresh air, El is a lucky man... <g>
Back on topic, this is a bit old and might have been posted
previously, I have been travelling, but anyway, FWIW...
H
__________________________
CPQ: There's Light at the End of the Tunnel; Raise Price Target to $50
06:24am EST 8-Dec-98 Salomon Smith Barney (GARDNER)
SUMMARY:
*A recent pick-up in business has prompted Compaq management to sound a
more positive note regarding the fourth quarter. We maintain our Q4
estimates of $11.6B in revenue and $0.38 in diluted EPS (versus
consensus of 10.9B and $0.36 in EPS).
*Areas of concern in the PC business are also showing signs of improvement;
CFO Earl Mason has said that Compaq is on track to turn internal PC
inventories roughly 20X this quarter, up from 13-14X in Q3. Product
cycle times are also improving and channel inventories remain at 3 weeks.
*In light of the strong demand outlook and progress on reengineering
issues, we have an even higher degree of comfort with our $1.97 estimate
for 1999. We are also establishing a 2000 estimate of $2.50, which
suggests a new twelve month target of $50. Maintain 1H (Buy) rating.
EARNINGS:
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/97 EPS $0.27A $0.30A $0.35A $0.42A $1.34A
Current 12/98 EPS $0.01A $0.02A $0.07A $0.38E $0.48E
Current 12/99 EPS $0.34E $0.42E $0.55E $0.67E $1.97E
Current 12/00 EPS $N/A $N/A $N/A $N/A $2.50E
FUNDAMENTALS:
Current Rank........:1-H Price 12/07/98......:$41.69
Prior Rank..........: Target Price........:$50.00
P/E 12/98...........:86.9X 52 Wk Price Range...:38.68 - 23.25
P/E 12/99...........:21.2X Proj. 5yr EPS Grth..:15.0%
Return on Equity 97.:21.00% BookValue...........:$14.63
LT Debt-to-Capital..:N/A% Dividend............:$N/A
Revenue 1998........:$32195.00 mil Yield...............:N/A%
Shares Outstanding..:1585.00 mil Convertible.........:No
Mkt. Capitalization.:$66078.65 mil Hedge Clause(s).....:
OPINION:
*All signs point toward a solid fourth quarter. CFO Earl Mason has
commented that Compaq could ship more than 4 million units this quarter,
which is slightly higher than our current estimate of 3.95 million.
Pricing pressures have eased from the first half of the year and average
selling prices are demonstrating a greater degree of stability. According
to Earl Mason, Compaq is now priced at or below HP, IBM and Dell on most
models. Geographically, North America and Europe remain very strong; in
fact, management cited a sequential uptick in European demand despite a
tough comparison. Japan is "coming back" for Compaq, China continues to
be strong, Latin America is "OK" and APAC continues to be weak. The
strength in Compaq's business appears to be broad-based, encompassing
both the consumer and corporate segments. Q4 demand has been very linear.
*Exiting the third quarter, we were concerned about Compaq's lagging PC
inventory turns and long manufacturing cycle times. Mason now says Compaq
is on track to turn PC inventories roughly 20X in Q4 versus 13-14X during
Q3. With a significant moderation in component price declines, 20X may
almost be sufficient to place Compaq in a position of manufacturing cost
parity. Product cycle times are currently 10-12 days according to Compaq
management (excluding in-transit time), which leaves an additional 5-7
days of improvement to reach management's goal of 5 days. When 5 days
cycle times become a reality, Compaq will be able to take the final step
toward two weeks of channel inventory and price protection. Mason
believes that Compaq will be able to perform internal build-to-order and
custom configuration on 90% of its PC volume by the end of 1999; he also
confirmed our belief that Compaq wants to minimize its use of channel
assembly or channel configuration to minimize product touches and
therefore product cost. Compaq intends to roll-out direct PC sales during
the first quarter of 1999.
*The DEC integration appears to be on target. Compaq anticipates
headcount reductions of approximately 5,000 during the fourth quarter.
This will bring total headcount reductions to 10,400, leaving 6,600
reductions for the first half of 1999. Sales force integration is
complete and Compaq has now turned its attention to cross training sales
personnel where necessary. Compaq manufactured its last DEC PC at the end
of November. Mason has reiterated Compaq's commitment to Alpha, and has
indicated that Compaq will sell Alpha servers at reduced gross margins in
order to gain market share. Mason also believes that double digit revenue
growth is possible within the services segment next year based partially
on new opportunities to sell Digital services into Compaq's customer
base. Currently, the maintenance business is growing in the single
digits, network integration and consulting is growing at close to 20%,
and the multivendor maintenance segment is growing at 25%.
*Specific income statement and balance sheet goals are beginning to take
shape for CPQ-TDM-DEC. Mason now believes the company can achieve a
long-term gross margin of 30%, operating expenses of 15-17% of revenue, a
reduction in contra revenues to 6-7% of total revenue, and significant
reductions in warranty and obsolescence expense over the next 2-3 years.
On the balance sheet side, management intends to take DSO from 58 days to
30 days, DPO from 51 days to 55 days, and blended inventory turns from
12X to 30X. Once again, Compaq believes that components inventory turns
will be roughly 20X in the core PC business this quarter!
*Recent demand trends in the PC and systems areas, PC reengineering
progress and headcount reduction progress give us an even higher degree
of confidence in our $1.97 estimate for 1999. Moreover, without giving
Compaq full credit for the attainment of these operating and balance
sheet goals during fiscal 2000, we arrive at a 2000 estimate of $2.50.
For this reason, we are raising our price target on Compaq shares to $50
(20X our new 2000 estimate) and maintain our Buy rating on the shares. |
