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

To: Elwood P. Dowd who wrote (94652)	1/9/2002 1:54:07 PM
From: Elwood P. Dowd	Read Replies (1) \| Respond to of 97611

We Like Compaq, Married or Single by: iamlongcpq (47/M/boston, MA) 01/09/02 01:30 pm Msg: 267968 of 267975 When personal computer stocks work, they really work. Compaq's (CPQ:NYSE - news - commentary - research - analysis) recent preannouncement of a good fourth quarter sets the stage for a nice move in the stock. Moreover, IBM's (IBM:NYSE - news - commentary - research - analysis) retreat from the PC business is very good news for both Dell (DELL:Nasdaq - news - commentary - research - analysis) and Compaq. Highly respected Lehman Brothers PC analyst Dan Niles put some fuel on the fire with an upgrade of the stock to a strong buy. Forget the Hewlett-Packard (HWP:NYSE - news - commentary - research - analysis) deal for a moment. Fundamentals are improving, and fundamentals matter. Operating expenses are down 15% year over year, and inventories declined by more than $1.5 billion in calendar year 2001. Also, stable component prices should enable Compaq to compete more effectively against Dell, which has the industry's lowest inventory levels. Dan Niles is predicting the commencement of a personal computer replacement cycle in the second quarter and third quarter of 2002. While the Olympics comes every four years -- I don't like Michelle Kwan's chances after dismissing her coach -- the computer replacement cycle runs on a three-year clock. I actually purchased my last home computer in 1998 from Dell, so I am overdue. As I buy Compaq stock, my wife wants a new Dell. I guess that's why Dell is No. 1. While most people sensibly think of Compaq as solely a PC stock, the company's Computing division addresses faster-growing markets that include UNIX and storage products. Additionally, the company's Global Services division has recently been the key profitability driver, and it provides annuity-like revenue streams. But, let's face it. This stock will trade on the performance of the PC division. Sorting Out the H-P-Compaq Mess Now for the fun part: the Hewlett-Packard deal. I don't know what's going to happen. Like President Bartlett's re-election campaign on The West Wing, this is going to be a really close race. Compaq's stock is trading at a 29% discount to the deal price. This arbitrage spread suggests the market does not believe that the transaction will close. If it doesn't close, Compaq shares should experience a little bit of pressure as arbitrageurs unwind their positions. But as the sizeable deal discount suggests, this transaction is not being widely played by the arbitrage community, which generally hates technology deals. The selling pressure should be short-lived and present a buying opportunity, and the stock should rebound based on its improving fundamentals. If the deal does close, Compaq shareholders will benefit greatly from the closing of the arbitrage discount. This is my kind of bet: improving fundamentals with an option on significant upside if the deal closes. I actually think Carly Fiorina will get the deal done. A rebounding economy and a better technology tape will grease the way. But this is not the reason to buy the stock. I just want to get ahead of the emails from RealMoney.com subscribers asking me what I think will happen.