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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Lynn who wrote (83783)	7/26/2000 2:29:58 PM
From: Piotr Koziol	Read Replies (1) \| Respond to of 97611

Thread: What the he!! is "Cash Conversion Cycle"? And whatever it is, how can ANYTHING be converted in < 0 time ? :^) /Piotr ********************************************************** Compaq Recovers -- Or Does It? Compaq turns in heartening Q2 results, as its improved income statement signals a potential turnaround. However, the company's balance sheet remains inferior to its peers and continues to hold back its share price. Until that changes, other box makers will likely continue to outperform. By Brian Graney (TMF Panic) July 26, 2000 Computing systems and services firm Compaq (NYSE: CPQ) gained some ground this morning after turning in estimate-matching Q2 EPS of $0.21, excluding investment gains. While the negative surprise-free results provided some more support for the building consensus that president and CEO Michael Capellas is doing a good job in turning the firm around after a disastrous 1999, the real share price driver this morning was more likely the firm's bright outlook for the second half of the year, which is expected to feature double-digit revenue growth. From an income statement perspective, Capellas has effectively stopped the bleeding at Compaq during his first year at the helm. The firm's commercial PC business, which represented a third of revenues during the period, returned to profitability a period ahead of expectations. Meanwhile, cost-cutting efforts yielded a pre-tax margin of 5.6%, up from 5% in Q1. As a result, sell-side analysts continue to shift the consensus opinion on the firm to a more positive bent, with at least three upgrades coming this morning. The glass is only half full Yet, despite the business performance and market sentiment shift, Compaq's stock hasn't moved up too much from last year's dark days. With today's gain, Compaq is up about 15% from a year ago. That's not too shabby considering Dell (Nasdaq: DELL) is up a similar 16% over the same span, but it doesn't come close to comparing to Gateway's (NYSE: GTW) 67% rise. Wasn't Compaq the depressed stock last year, thereby offering the most potential upside? Some commentators have reasoned that the company simply has "a long ways to go" to win back "investor confidence" before its stock will climb further, or something brainless like that. Wow, really? All perfectly obvious observations aside, the real reason behind the sputtering stock price runs a tad bit deeper. The balance sheet will lead the way Sure, the company has managed to improve its income statement over the past year, at least from the point of view that all of last year's red ink has been wiped away. However, Compaq's balance sheet hasn't changed much and its financial aerodynamics are still crappy relative to its direct model peers, as the following comparison with Gateway shows: Cash Conversion Cycle** Gross Margin (%) (ttm, in days) Compaq Q299 35 20.5 Q200 34 23.3 Gateway Q299 -2.5 22.0 Q200 -4 23.3 While on a margin basis the companies look similar, the cash dynamics remain worlds apart. In fact, the spread between the two firms' cash conversion cycles has actually widened in the past year, expanding from 37.5 days to 38 days. Given the size of that spread, it's actually fairly surprising that the spread between the two companies' earnings multiples is as thin as it is, with Compaq priced at 27x this year's expected earnings compared to Gateway's 32x multiple. So Compaq indeed does have "a lot of work to do," specifically on its balance sheet. For investors wondering when Compaq's income statement recovery will carry over into a share price recovery, the balance sheet is the item to keep an eye on over the coming quarters.