Compaq nagged by revenue concerns
By Binti Harvey, CBS MarketWatch
Last Update: 1:25 PM ET Jan 26, 1999
NewsWatch
NEW YORK (CBS.MW) -- While Compaq Computer Corp. shares surged on
its planned spinoff of Alta Vista Tuesday, analysts worried that the company
will report revenue that falls short of targets in the fourth quarter.
The leading computer systems manufacturer (CPQ)
advanced 5.6 percent on reports it will spin off its Alta
Vista search engine unit for as much as $2 billion.
See related story.
The buying spree triggered by the announcement may
be short-lived, however. Compaq will report
fourth-quarter results Wednesday, and although it is
widely expected to post a modest upside surprise,
analysts expressed concern that revenue will not
meet projections.
The average estimate of analysts surveyed by First
Call is 37 cents a share, down from 42 cents a year
ago. Compaq will report before the market opens
Wednesday morning.
"We have been looking for earnings of 39 cents on
revenue of $10.75 billion, the former just a shade over
the consensus, and the latter somewhat below
management's $11 billion guidance exiting the third quarter," said SG Cowen
analyst Richard Chu.
Amid declining average selling prices for personal computers, revenue growth
is acquiring greater significance as a measure of performance for computer
makers. Although lower PC prices have increased consumer demand, unit
shipments must accelerate substantially to sustain historic revenue and profit
growth.
"We believe investors will focus more on Compaq's top
line than its bottom line results and believe outlook
statements will dictate how the stock trades," said
Kimberly Alexy, computer analyst for Prudential
Securities.
Despite PC unit volume growth of about 20 percent and
significant market share gains in the fourth quarter,
many analysts expect sales to fall short of
management's guidance of $11 billion, projected at the
end of the third quarter.
Compaq's channel inventory management may also
return to haunt the company. Analysts have conflicting
opinions about the company's inventory levels exiting the fourth quarter. Piper
Jaffray analyst Ashok Kumar believes that Compaq is "channel stuffing," or
shipping excess inventory to the retail channel to inflate shipment figures.
Compaq and other PC makers' profits fell prey to oversupply at the same
time last year, as the companies waged an aggressive price war to reduce
excess inventory.
"We now estimate Compaq's PC sales-in level in the fourth-quarter is
expected to be inflated by about two weeks of shipments," said Kumar.
Alexy disagrees. "The fourth quarter marks the first quarter where PC sales
into the channel equaled sales out," Alexy said. "Channel inventory levels
have remained at between 3 to 4 weeks for the full quarter."
On the positive side, Compaq will likely report impressive PC unit volume
growth. The company remains the PC market leader, and the PC business is
expected to have generated approximately $7.8 billion in revenue, driven by
strong consumer sales in December. Analysts also expect strong gross
margin improvement, from 24.9 percent in the third quarter to above 27
percent.
Shares rose 2 |
