Some very relevant information:
COMPAQ COMPUTER: Both Strategy and Execution Need Changing
09:15am EDT 30-Apr-99 Merrill Lynch (S.Milunovich/K.Campbell)
NEUTRAL*
Long Term
BUY
Estimates (Dec) 1998A 1999E 2000E
EPS: $0.57 $1.20 $1.75
P/E: 1.6x 19.7x 13.5x
Q1 EPS (Mar): $0.01 $0.15
Investment Highlights:
o We maintain our Neutral rating given the CEO search and our view that more
than execution needs fixing. It typically takes six months after a new CEO
comes in for the stock to move.
o We believe Compaq could recover, however, so value investors should take a
hard look, particularly for the long-term.
Fundamental Highlights:
o Our surveys show that Compaq has lost momentum relative to IBM and Sun, in
part because it has no Internet aura.
o Compaq's execution would benefit from simplification. The reorg announced
yesterday moves the company in that direction.
o We think the strategy needs rejiggering as well. We're down on the hybrid
distribution model but aren't sure what the answer is.
o We are sure that Compaq needs to articulate its differentiation. We like
the phrase "bringing PC economics to the enterprise" that the company has
sometimes used.
What To Do At Compaq?
Chairman Ben Rosen has said that Compaq's strategy is fine, it's the execution
that needs mending. No doubt the execution does need help. But the strategy
could use some tweaking as well, a conclusion the leadership triad will likely
agree with as they examine operations. Most of all, Compaq needs to articulate
its differentiation.
There is little question that Compaq has lost momentum due to problems in PCs
as well as the integration of DEC. Beyond the financial results, our Corporate
Buyers' Survey provides evidence:
Is Compaq gaining or losing momentum at your account?
Gaining 31%
Losing 33
No change 36
Regarding execution, Compaq did say that while it will be in multiple
businesses, its organization doesn't have to be complex. For example, Compaq
probably has too many SKUs as Apple did. The reorg announced yesterday may
have been precipitated by PC head Michael Heil's resignation, but it does
simplify reporting lines. The North America and European sales and marketing
regions now report directly to the Office of the CEO, which should give
management a better global view and result in faster decisions. Too many
executives confuse complicated strategies with competitive advantage. Simple
strategies can be difficult to implement and therefore imitate (see Dell). We
also hear that Compaq has gone casual dress with the view "how can we move at
the speed of the Internet if we don't dress like it?"
On the strategic front, Compaq has to make tough decisions regarding
distribution. Our view has been that the hybrid model is a disaster waiting to
happen. Focus wins-a hybrid model is like server companies that support
multiple operating systems. It's expensive and messy. The Prosignia direct
initiative that ticked off the channel brought the issue to a head. Should
Compaq dump the channel altogether and resign itself to losses for awhile?
That seems too extreme to us, but Compaq may have to rationalize the number of
channel partners. This is a tough nut to crack and we don't know the answer.
Another strategic issue is Compaq's positioning-what does Compaq stand for?
We've liked Dell in part because Compaq's acquiring DEC muddies what Compaq is
and should accelerate Dell's share gains as a pure PC player. Compaq's
advertising shows that it hasn't discovered its identity. "Better answers" is
just a claim that isn't related to Compaq's strengths. Furthermore, Compaq
hasn't created an Internet image as Sun and IBM have as shown in our latest
survey.
The good news is that users do give Compaq a chance as an enterprise company
following the DEC and Tandem deals:
Is Compaq successfully becoming an enterprise player?
Yes 41%
No 37
Maybe 22
Other than say that it now offerings full-blown solutions, Compaq hasn't given
users much reason to buy from Compaq over IBM, Sun, or HP (the vendor that
looks most like Compaq). The phrase we've heard Compaq use that makes sense to
us is "Bringing PC Economics to the Enterprise."
We like this positioning because (1) it plays off what is in the customer's
mind (Compaq is a PC company and the leader in PC servers), and (2) the
strengths Digital brings (services, Exchange installations). The problem is
that Wintel technologies aren't ready for the enterprise, which could change
within two years with Merced/McKinley and Windows 2000 and follow-ons. Time is
on Compaq's side here. This positioning is quite different from IBM's and
Sun's. HP could take the same tack but has a greater Unix commitment. Compaq
might have to de-emphasize Alpha and Tru64 (and Monterey) Unix; on the other
hand, it should go whole hog with Linux before Dell does.
Although we don't recommend the stock for the intermediate term, there is long-
term value. Compaq is savable. We were asked the other day whether Compaq's
operations are as poor performing as Unisys was. We do not think so. Value
investors should take a hard look, particularly for the long-term.
|
