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

To: Elwood P. Dowd who wrote (91361)	5/23/2001 10:56:24 AM
From: PCSS	Respond to of 97611

GS's CPQ coverage (FINALLY): Compaq Computer Corp. [CPQ] $17.71 CPQ: Initiating coverage with MO rating EPS (FY Dec): 2001E US$0.53, 2002E US$0.86 - Market Outperformer * We are initiating coverage of Compaq with a market outperformer rating, with 2001 estimates of $0.53, and 2002 estimates of $0.86. The valuation of the stock is at a multi-year low on a price-to-sales basis, and earnings are likely to recover in an economic recovery scenario next year. The company does face significant strategic challenges in focusing on growing the enterprise and services businesses while harvesting the commodity businesses (primarily the PC business) in a tough macroeconomic environment, but the valuation should limit downside potential with material upside leverage when the environment improves. * Several of the company's business segments offer significant product differentiation, including external storage (just over 5% of revenues), high end 4-processor and 8-processor industry standard servers, the professional services business, and segments of the Access business(such as the iPaq handheld). The Capellas-led management team has substantially increased the development resources in all of these differentiated areas, and while there are currently business challenges everywhere we are comfortable with the strategies that are in place for these divisions. * On the other hand, several segments are coming under significant pricing pressure: desktop and notebook PC's, and low end one- and two-processor industry standard servers. The commodity segments still drive the majority of revenue, though the proprietary group drives the majority of profits. Harvesting these commodity areas during a period of industry weakness will be challenging, and de-emphasizing the importance of them is unlikely to improve profitability without a stronger economic tailwind. The company may well find that volatility in these businesses offsets gains in the proprietary areas, in the short term.