Compaq Preannouncement Throws Analysts for a Loop
By Eric Moskowitz and Marcy Burstiner
Staff Reporters
4/9/99 8:57 PM ET
Late on Friday, the PC analysts were fuming. At the end of a quiet week, Compaq's
(CPQ:NYSE) shocking earnings preannouncement caught most analysts
wrong-footed, and forced them to rearrange their earnings models for the whole PC
and hardware sector.
There was a time when Compaq was a Wall Street darling. Oh, how time has
changed. Compaq now says that it would report earnings of 15 cents a share, less
than half of the 31 cents a share that analysts expected. Revenues will be around
$9.4 billion. Compaq blamed weak demand and tough competitive pricing pressure for
the fall in profits.
One analyst, however, was gloating. "Did I tell you, or did I tell you?" Piper Jaffray
analyst Ashok Kumar gleefully said shortly before he went on CNBC Friday evening
to crow about his prescient Compaq earnings prediction.
Just last month, Kumar said the Houston, Texas-based PC maker would earn 20
cents a share in its March quarter. Kumar, who maintains a buy rating on Compaq,
had previously said Compaq would earn 35 cents a share, in line with consensus
estimates at the time.
Most PC analysts seemingly misjudged the buying patterns of corporations this year.
In January, the consensus was that companies would keep buying PCs and
computer supplies during the first half of 1999, and then orders would tail off as Y2K
approached. But it seems as if corporations made their big PC orders in the second
half of 1998. PC demand is down sharply this quarter, and some 20% below
December 1998 quarter levels, according to recent projections from Credit Suisse
First Boston.
In terms of the PC industry, the news just isn't good -- no matter how you look at it,
says Don Young, an analyst at Paine Webber. "I hate to see the industry I cover get
trashed," he says. "But investor's attitudes had been that it's bad, but it's going to get
better, and that's a Pollyannish view in my opinion."
In February, Dell (DELL:Nasdaq) disappointed the market with its
weaker-than-expected revenue growth. Now comes Compaq, the leading PC seller in
the US, complaining of pricing pressures.
"It's the profit margins that were hit hard," says Walter Winnitzki, an analyst at
Hambrecht & Quist who had a buy rating on the stock. Winnitzki says that pricing
pressures combined with lower-than-expected PC demand are hurting Compaq --
which sell more PCs than anyone -- extremely hard. Hambrecht & Quist and Piper
Jaffray have done no Compaq underwriting.
The rest of the industry will also be hit hard because this quarter in particular is so
back-loaded, says Jeff Matthews, money manager at Ram Partners, who is bearish
on the industry.
"This has implications for Hewlett-Packard (HWP:NYSE) and IBM (IBM:NYSE) as
well -- this isn't just an isolated problem because all these companies do not have a
lot of visibility this quarter," he says. IBM and H-P are the third and fourth-largest
sellers of PCs worldwide. Matthews has no position in PC stocks.
Compaq's dire warnings will be a shock to the rest of the tech sector Monday
morning, especially PC-centric semiconductor stocks such as AMD (AMD:NYSE)
and Intel (INTC:Nasdaq), which will announce first-quarter earnings late Tuesday.
As for the chip stocks, the relatively short bull run in the sector may be over. The dour
Compaq news will certainly push lower the Philadelphia Semiconductor Index,
which was ever so close to an all time high, said CIBC Oppenheimer chip analyst
Ken Pearlman. "It can't be positive," he said.
Pearlman said he's been concerned that companies are putting on hold the buying of
new hardware or enterprise software while they conduct tests for Y2K bugs. "We are
doing that here at CIBC, we'll have a lock down period and a lot of companies are
doing it," he said.
Pearlman believes Intel's outlook will not be good, given that Compaq has warned
about decreased market demand. He expects Intel to report a soft mix of products
sold and decreasing average sales prices.
The recent bullishness in computer hardware and chip stocks comes despite rumors
mid-March that Intel would preannounce (it did not) and two preannouncements by
the other chip maker AMD.
"The market just doesn't seem to respond to anything anymore," he said. "At best we
will have a lot of volatility until the stocks can absorb some of the price gains."
In the meantime, Intel's earnings Tuesday suddenly have become the key numbers
for the whole health of the industry.
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