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

To: Rosemary who wrote (9969)	12/2/1997 12:59:00 AM
From: Kai-Uwe	Read Replies (2) \| Respond to of 97611

Another 'encouraging' comment for all those fearing an inventory build-up in the channels... CPQ: Christmas prebuild has increased channel inventory to 5-6 weeks; year-end target of 2-3 weeks; Corporate demand very strong potentially leading to flat/up ASPs and margins sequentially 12:02pm EST 25-Nov-97 BancAmerica ROBERTSON STEPHENS (Niles, Daniel) KEY POINTS: * There has been much discussion recently about inventory building in the channel. First of all, Compaqs inventory in the channel is currently about five to six weeks worldwide relative to about four weeks at the end of Q3. A one-to-two week build is fairly normal right before Thanksgiving, with inventory being worked down by the end of December. Last year, worldwide inventory increased from about 9-10 weeks to about 12 weeks at this time and then declined to 10 weeks by the end of December. Compaq continues to maintain a worldwide year-end inventory target of two to three weeks, which we believe is reasonable. When looking at inventory by region, the U.S. is running at six to seven weeks, Europe at two to three weeks, and Latin America at about one week. Inventory by BTO versus non-BTO is also vastly different. Approximately 50% of commercial products are BTO in North America, and those are at two to three weeks of inventory. The other 50% are about 10-12 weeks of inventory and are expected to be converted to the BTO/CTO/CCP model by the end of the year. CTO and CCP are expected to be rolled out before year end. Although inventory currently might be slightly higher than we would like at some resellers, these same companies are also saying that sell through is also higher than expected. The bottom line is we are not overly concerned about the inventory increase given the time of year and sell through. * A surprising statistic is that even though consumer revenues continue to be strong, corporate demand is just as strong. In fact, the consumer business is not expected to increase as a % of revenues in Q4 from the 21% achieved in Q3 leading to flat to up ASPs (of about $2,300) and margins sequentially. There seem to be three main factors driving corporate growth: (1) increased competitiveness versus other vendors especially direct, (2) corporate upgrades to NT to solve Year 2000 issues, and (3) the spending of corporate budgets before year end. * In terms of valuation, we would note that Compaq for the first time since Q4:95 grew faster than Dell in the just completed quarter, with 17% sequential revenue growth versus Dell at 13% and with sequential unit growth of 26% for Compaq versus Dell at 17%. We expect better growth rates for Compaq in Q4 as well. Given this, we believe that the current P/E of 17x for Compaq is too low given Dell has a 23x multiple. We continue to believe that until valuations readjust that investors are best served in the near-term owning Compaq and not Dell. EPS Ticker Price LTM Price/ Cal. EPS Est. P/E Growth Symbol 11/25/97 Revs Sales 1997E 1998E 1997E 1998E 98/97 CPQ $60.00 $23,119 2.1 $2.67 $3.45 22.5 17.4 29% DELL $79.75 $11,002 2.6 $2.57 $3.40 31.0 23.5 32% Source: Company reports and BARS estimates RATING: We rate Compaq as a Buy. THE COMPANY AND INVESTMENT THESIS: Compaq Computer Corporation is the leading brand name in the manufacture of servers, desktop, and portable personal computers. Compaq and Microsoft Corporation have partnered to establish standards for the world computing market. Compaq's products are sold and supported in more than 100 countries through a network of more than 30,000 marketing partners. During the past several quarters, Compaq has gained substantial market share while keeping expenses under tight control. With added production capacity and a positive reception to new products, the company has the ability to continue its top-line growth while continually expanding profitability. INVESTMENT RISKS: Among the risks are the ever-present fear of a decline in demand. Historically, this has resulted in price wars aimed at holding market share and alleviating rising inventories. In turn, these pricing moves have led to significant industry losses.