Montgomery Securities on COMPAQ's "new
decisiveness" - and its attitude
to Direct. (thanks to my source).
"Today's announcement is a clear
endorsement for the role of distributors and
for the channel in general. We doubt we would
have gotten such a bold announcement only three
weeks after the arrival of the new CPQ management
regime if a more forceful move to direct selling
was going to be part of the new team's plan. Compaq
indicated on its call that if 25% of its sales wind
up going 'direct' (this is the same percent we've
heard in prior management comments), fully 75% of
these sales were likely to be fulfilled by the
channel in some fashion".
CPQ: Channel Consol
- New Decisiveness at CPQ Leads
to Windfall for 4 Distributor
05:52pm EDT 10-May-99
Montgomery Securities (K. King)
FY Ends 12/31 1998A 1999E 2000E
Q1 (Mar) $ 0.01 $ 0.16A
Q2 (Jun) 0.02 0.21
Q3 (Sep) 0.07 0.29
Q4 (Dec) 0.43 0.43
Fiscal Year $ 0.53 $ 1.09 $ 1.75
P/E 48.9x 23.8x 14.9x
P/E/G 245% 119% 74%
Compaq Channel Consolidation
-New Decisiveness at Compaq Leads to a
Windfall for Four Distributors
o As expected, Compaq today announced
the consolidation of its U.S.
distribution around four distributors
- Ingram Micro (IM, BUY, $26), Tech
Data** (TECD, BUY, $30), Merisel*
(MSEL, HOLD, $3), and Inacom
(ICO, not rated, $12).
o A windfall for the group of four
- by our calculations, a minimum 7% boost
to the group's collective top line.
An eventual 15% boost is easily conceivable
for TECD and IM assuming Compaq's
(CPQ, BUY, $26) consolidation goes
international and especially i
HP (HWP, BUY, $78) and IBM (IBM,
not rated, $219) follow suit.
o CPQ's endorsement of distributors
implicit in this announcement should help
distributor multiples in ddition to
financial outlooks.
o TECD, our favorite in the distribution
group, still looks cheap at 10x our
$3.10 CY 00 EPS estimate. Reiterate this
morning's new target price of $40.
o Should also be positive for CPQ due
to less channel inventory and less complex
execution issues. We're encouraged by CPQ's
new decisiveness although we expect the
benefits of consolidation to reveal
themselves over several quarters.
s we anticipated last week, Compaq
this morning announced a restructuring
of its commercial U.S. distribution
to center on four distributors
- Ingram Micro (IM, BUY, $26), Tech Data
(TECD, BUY, $30), Merisel (MSEL, HOLD, $3),
and Inacom (ICO, not rated, $12).
These four distributors will co-locate
alongside Compaq in Houston and provide
product to Compaq's other commercial
channels, namely VARs/integrators and
direct marketers.
The new program means a top line windfall
for the four designated distributors.
PC vendors' channel rationalization efforts
have been hindered by a reluctance to create
new winners and losers. That changed with
today's announcement. We believe that about
50% of CPQ's North American commercial PC sales
will be redirected to the four distributors
named today. Very roughly, this would suggest
AT LEAST a 7% addition to each distributor's
top line. (We assume CPQ's commercial PC business
is $14 billion this year, 50% is North
American and 50% of this goes to the new group
- this translates into about $3.5 billion
in redirected sales.) A lot is excluded
from this 7% figure -- namely, the
opportunities from HP and IBM following suit,
all three vendors making this move
internationally, and from the add-on
peripheral sales accompanying the incremental
PC sales. The 7% figure we mention could easily
be 15% when the full consolidation opportunity
is taken into account, at least for
TECD and IM, who are both big players in
Europe and other international markets.
We continue to view TECD and IM
as the program's clearest beneficiaries.
TECD's established co-location facility could
give it an early advantage. As we noted last week,
Tech Data made an early bet on co-location in
Houston and could begin adding volumes
mmediately. Ingram has resisted vendor co-location
and might need to re-direct resources from a
relatively new 600,000 sq. ft. facility in
Memphis, near FedEx, in order to participate
fully in Compaq's new program. We also view TECD
as particularly attractive on a
valuation basis, at 10x our CY 00 estimate
of $3.10, or less than half its growth rate.
Longer term, Ingram's relative advantage is
stronger in that its international presence
extends not just into Europe, like Tech Data's,
but also into Latin America and Asia. Consolidation
of international distributors is aclear way for
PC vendors to simplify their operations.
CPQ believes it can reduce channel inventories
by 50% through this program, which will reduce
inventory stocking locations from about 100 to
only 30. (The four distributors each maintain
several warehouse locations.) We see several ways
in which Compaq can reduce costs and improve execution
with this move, although we expect the benefits to
evolve over several quarters. In contrast, we believe
the benefits to the four distributors could be
immediate and significant once the new program
kicks off on August 1.
Today's announcement is a clear
endorsement for the role of distributors and
for the channel in general. We doubt we would
have gotten such a bold announcement only three
weeks after the arrival of the new CPQ management
regime if a more forceful move to direct selling
was going to be part of the new team's plan. Compaq
indicated on its call that if 25% of its sales wind
up going 'direct' (this is the same percent we've
heard in prior management comments), fully 75% of
these sales were likely to be fulfilled by the
channel in some fashion. |
