Mohan-san:
Have you seen this? From Individual Investors:
Compaq: 'The Mother of All Disasters'
Analyst: Chris Bulkey (4/12/99)
Shares of Compaq Computer (NYSE: CPQ) plunged
by as much as 26% today, after the world's largest
personal computer maker warned, after the closing of
trading on Friday, that first quarter results would be below
analyst's expectations.
The market braced for today's sell-off and sure enough
got it. The stock was recently trading at $24, down
$6.94, or 22.4%, on the day.
Like this Article?
With blood in the streets, the temptation for some is to
bottom-fish. We'll answer whether you should and we'll
look at how other PC makers are looking in light of
Compaq's punishing day.
'Mother of all Disasters'
Analyst feedback regarding the health (or lack thereof) of
the PC industry is widely varied to say the least. One thing
that analysts are not refuting, however, is that Compaq's
first quarter will be terrible. US Bancorp Piper Jaffray
analyst Ashok Kumar called Compaq's expected first
quarter numbers the 'mother of all disasters.'
A number of brokerages, including Goldman Sachs,
BancBoston Robertson Stephens and Morgan Stanley all
lowered their ratings on Compaq. And analysts scrambled
to lower estimates for Compaq's earnings outlook. One
area, however, where analysts are not coming to a
consensus involves whether or not Compaq's problems
are company specific or mark the beginning of an
industry-wide price war.
Compaq announced on Friday that revenue will come in
at $9.4 billion, while earnings will be $0.15 per share.
Sales are roughly in line with analysts' forecasts, but
earnings are going to fall 51.6% below the consensus of
$0.31 per share. Here is where the dissenting opinions
begin. The company attributed the shortfall to weakness
among corporate PC sales where weak demand lead to
an unfavorable product mix, which pressured margins.
Hambrecht & Quist, Prudential, Warburg Dillon Read,
US Bancorp Piper Jaffray and BT Alex Brown all echoed
similar sentiments saying that Compaq's problems are
company specific and not indicative of the overall state of
the industry.
They think demand in the corporate side of the market is
somewhat soft, but was exacerbated with Compaq due to
large end of the quarter sales that were missed. Prudential
analyst Kimberly Alexy notes that concerns that overall
PC sales are slowing have been mitigated with indications
that order rates have accelerated in March.
All indications are that Compaq's overall mix was
unfavorable with price concessions in the corporate
sector, which ate into profits. H&Q and Warburg Dillon
Read also speculate that Compaq's server business is soft,
which highlights ongoing integration problems with the
Digital acquisition.
Imminent Price War?
Differing opinions are offered by analysts at Paine
Webber and Salomon Smith Barney who feel that the
magnitude of the shortfall is an indication that an industry
wide price war is about to begin. They think sub-$1,000
computers and the commodity-like nature of the PC will
continue to lead to lower prices. The lower pricing
outlook combined with an inability to differentiate will
cause manufacturers to compete on price. It is therefore
believed that a fight for market share is already underway,
at least in the corporate segment.
All is Well over at Dell
Evidence that the problems are specific to Compaq was
provided by Dell Computer (NASDAQ: DELL), when
the company met with analysts last Thursday (click on
Dell's ticker to read our April 9th update). Dell offered
a bullish outlook that lead BT Alex Brown Analyst
Michael Carboy to say the company should continue to
outgrow the market by a factor of 2-3 times.
Dell's direct sales model and expanding PC server and
services businesses should help to insulate the company
from some of the problems that currently plague Compaq.
Dell's efficiency in managing working capital should put it
in a position to withstand pending price wars.
At this time it is very difficult to get a sense of how the
remaining PC makers fared this quarter. Compaq gave
analysts virtually no advance warning of its difficulties,
which calls into question its credibility with analysts --
another Compaq specific issue.
Technology stocks, in general, are toppy after the most
recent run-up, which will magnify any earnings warnings
into significant downside in share price. Just look at
today's sell-off in Compaq's stock for proof of what an
earnings disappointment can trigger with markets at
all-time highs.
Upcoming earnings announcements from the other
'box-makers' are going to be critical to determine exactly
where the PC market is headed. Feedback from analysts
indicates that Dell is in the best position to deliver a strong
quarter.
Gateway, Micron Electronics, IBM,
Hewlett-Packard
Gateway (NYSE: GTW) should benefit from a large
exposure to the consumer segment, but may not be able
to withstand price wars due to its high expense structure.
Micron Electronics (NASDAQ: MUEI) also has a
large consumer presence, but would be prone to pricing
pressure should it emerge in their business segments.
IBM (NYSE: IBM) and Hewlett Packard (NYSE:
HP) have very diversified businesses with PCs accounting
for a minor percentage of revenue making their results an
inappropriate benchmark.
At this point there is no consensus as to what lies ahead
for PC stocks. The slew of upcoming earnings
announcements will determine exactly, which side of the
argument detailed above will prove to be correct. My
advice at this point is to underweight the PC
hardware sector, as there is simply too much
uncertainty as to how Compaq's problems will affect
other manufacturers.
After the smoke clears we expect that Dell will emerge
as the best positioned to generate consistent
profitability, and we continue to view the company as
the best investment in the sector. Dell has proven time
and again that they simply manage their business better
than anyone else, and their booming e-commerce sales
should provide upside.
Bottom Line:
The market is behaving as though the problems will
ultimately prove to be related to Compaq specific issues,
as the Nasdaq has rallied from a near 70 point decline
earlier this morning to be up by 7+ points at midday. , We
don't recommend bottom-fishing on Compaq.
Paul |
