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To: fp_scientist who wrote (16003)	10/25/2000 9:34:08 PM
From: Maverick	Respond to of 275872

ML:CPQ Consumer PC sales were remarkably strong,growing 45%. Commercial PC is also strong, up 28% Excerpts from ML 10/25/00 Investment Highlights: • Compaq reported very strong 3Q revenue of $11.2 billion (up 21.6%), easily surpassing the $10.8 billion Street consensus (up 17.3%). This represents a major improvement over the 1% & 7.5% yr/yr growth rates registered in 1Q & 2Q of this year. EPS of $0.30 ($0.31 with inv. gains) beat the Street consensus of $0.29. • As a result of what appears to be a material delta (7%) between the company’s fixed euro hedge lock-down rate and the actual behavior of the currency quarter-to-date, we are modestly reducing our Q4:2000 EPS estimate to $0.37 from $0.40 previously. We have actually raised our sales estimate to $12.31 billion (17.5%) from $12.16 billion (16.1%) to reflect 3Q’s unanticipated strength. • Enterprise computing sales grew by 19% to $3.79 billion. Consumer PC sales were remarkably strong, growing 45% in the quarter to $2.1 billion. The commercial PC group also turned in a strong quarter with revenue of $3.5 billion, up 28% from last year. • Given what appears to be improving momentum behind the numbers, we reiterate our Accumulate rating on Compaq shares and set a price objective of $32, based on 23x our calendar 2001 EPS estimate of $1.40. Q3 Results Exceed Expectations… Compaq reported very strong third quarter revenue of $11.2 billion (up 21.6%), easily surpassing the Street consensus of $10.8 billion (up 17.3%). This represents a major improvement over the 1% and 7.5% yr/yr growth rates registered in the first and second quarters of this year. Operating EPS of $0.30 ($0.31 including investment gains) also beat the consensus of $0.29. The gross margin was 23.9%, below our 24.5% estimate, but 30 basis points the level achieved in Q2. As a result of strong sales leverage and good expense control, the company’s operating margin rose to 7.0%, up from 5.6% in Q2 and 4.5% in Q1. Inventory was slightly higher than expected at 3.9 weeks in the commercial channel and 5.3 weeks in the consumer channel. Product revenue grew by an impressive 25.5% to $9.52 billion, versus our 18.4% growth forecast. Sales here were driven by a strong performance in consumer (up 45%) as well as in commercial PCs (up 28%) and in WinTel-based servers (up 41%). Global services, on the other hand, could have been stronger, growing at only 3.5% versus our 6.5% forecast despite solid server growth across both WinTel and Unix. The real drag here was professional services, which grew negatively by 2%. Compaq continues to work toward rejuvenating this business through reorganization and improved management. We expect better performances going forward. Overall services revenue came in at $1.72 billion (15.3% of total sales) with an operating margin of 15% versus 17% in the third quarter of last year. … But Revising Down Q4 EPS Estimate As a result of what appears to be a material delta (7%) between the company’s fixed euro hedge lock-down rate and the actual behavior of the currency quarter-to-date, we are modestly reducing our Q4:2000 EPS estimate to $0.37 from $0.40 previously. The consensus estimate had been $0.41. We have actually raised our sales estimate to $12.31 billion (17.5%) from $12.16 billion (16.1%) to reflect the third quarter’s unanticipated strength. But we have also lowered our Q4 operating margin assumption to 7.9% from 8.7% to reflect the negative currency impact. We would add that fourth quarter EPS is not without risk. For 2001, we have modestly raised our sales estimate to $48.236 billion from $47.639 as a result of a higher base in 2000. However, we have kept our growth rate at 12% and EPS at $1.40, almost a dime below company guidance. Reiterate Accumulate Rating We are tempted to use the strength behind the company’s third quarter as a launching pad to upgrade the shares to Buy from Accumulate. However, at this juncture, in light of the downward earnings revision, we believe it is more prudent to take a wait and see strategy. While we still think the stock is a terrific value at current levels, and indeed encourage investors to accumulate a position in the name, we still believe Gateway has the most potential for share price expansion though year-end. Given what appears to be improving momentum behind the numbers, we reiterate our Accumulate rating on Compaq shares and set a price objective of $32, based on 23x our calendar 2001 EPS estimate of $1.40. Strong Enterprise Growth Enterprise computing sales grew by 19% to $3.79 billion (33.9% of total sales). The operating margin of 15.7% was much higher than the 9% recorded in the third quarter of last year. The real driver here was an extraordinary 41% growth rate in industry standard servers to $1.6 billion (14.3% of total sales), with 4-way and 8-way servers particularly strong. It appears that Compaq has eaten into some of Dell’s growth in this area through competitive pricing and improved perception around the brand. Business critical server sales hit $813 million (7.3% of total sales), 5% higher than last year, led by the new Wildfire Alpha-based UNIX servers. Wildfire hit our target of 400 units in the quarter with 20% going to new customers. We expect a sequential uptick in 4Q as component issues look to be resolved. Himalaya was down yr/yr due to component shortages. The storage products group grew revenue by 9% to $1.4 billion. The enterprise piece which includes storage area networks, high-end tape, and software grew an impressive 44% in the third quarter. The much larger external attached storage portion of the business suffered extreme disk drive-related pressure resulting in lowered growth of the overall category. We expect improving revenue growth in the storage products group in 4Q driven by continued momentum in Compaq’s server business. PCs Surprisingly Strong Consumer PC sales were remarkably strong, growing 45% in the quarter to $2.1 billion (18.8% of total sales) due in part to terrific products and stellar execution. The operating margin came in at 3%, down from last year’s 4%. While Compaq continues to benefit from the retail withdrawal of Packard Bell and IBM, we believe that these results bolster our belief that consumer demand is OK. At quarter end, 15% of consumer PCs worldwide were sold directly. Compaq’s commercial PC group also turned in a strong quarter with revenue of $3.5 billion (31.2% of total sales), up 28% from last year. Importantly, the group turned a solid profit for the second consecutive quarter. The operating margin improved to 4%, up from 2% last quarter owing to more direct system configuration and shipment of products as well as overall cost cutting. At the end of the third quarter, 30% of commercial PCs worldwide were sold directly. cbs.marketwatch.com Compaq uses a 50-50 mix of Intel and Advanced Micro Devices processors in its consumer products.