Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: MeDroogies who wrote (94234)	12/13/2001 4:43:03 PM
From: Elwood P. Dowd	Read Replies (1) \| Respond to of 97611

Merrill's Fortuna on Compaq by: skeptically 12/13/01 04:41 pm Msg: 264608 of 264608 Quarter Tracking Reasonably Well • Based on a series of checks, we believe that Compaq is tracking to meet or beat our forecast for the December quarter (4Q01). We are currently modeling EPS of ($0.04), a penny below the Street consensus of ($0.03). While we think our forecast is reasonable, there is potential for modest upside to our revenue and margin forecast. However, given the uncertain environment and nearly three weeks remaining in the quarter, we are not changing any of our estimates. We maintain our intermediate term Neutral rating on Compaq shares. • On the top line, we are looking for revenue of $7.62 billion (up 2% Q/Q but down 34% yr/yr), at the low end of Compaq’s expectations and in-line with the consensus view. The company’s outlook calls for 4Q revenue between $7.6 billion and $7.8 billion. Compaq’s consumer business appears to be experiencing nearly normal seasonality. Note, however, that with consumer representing roughly 20% of the total top line, it will not be the major driver of Compaq’s performance. The company also appears to be seeing a positive seasonal uptick in Europe, although pricing there remains very aggressive. We see little indication, however, that U.S. corporate demand has improved. There is also some concern that the company will not see any of the typical year-end kicker from corporate budgets that need to be used up. • Moreover, Compaq’s auto-replenishment system for the channel suggests that the company is delivering product to the channel only when sell-through occurs, leaving no opportunity for the company to manipulate the quarter. Management discipline in this regard appears unwavering. • We also expect some modest degree of channel inventory drawdown to occur in the fourth quarter. Recall last quarter, Compaq reduced channel inventory by $450 million. We would peg the reduction in the $100-150 million range. • We are currently modeling a relatively conservative gross margin of 19.6% in Q4, down from last quarter’s 19.9%. There could be some room for upside here, but we believe it is early to make that call. Recall that Compaq’s gross margin in the third quarter was down sharply from the 21.5% recorded in the second quarter. This was due to pricing pressure, reduced volumes, a lower mix of 4-way and 8-way servers, and the P3/P4 transition. • Compaq continues to make progress on the cost side. At the end of the third quarter, Compaq had eliminated 7200 of the 8000 bodies announced in March. The overall body count was roughly 66,000 at the end of the third quarter. Despite some select hiring in the services business, we expect a further body count reduction in the fourth quarter. We are currently modeling a $50 million sequential drop in fourth quarter operating expenses to $1.54 billion. We feel this is an accurate assessment of the current cost structure. • On the merger front with HP, Compaq’s shareholder vote will likely occur in mid-March.