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

To: hpeace who wrote (10036)	12/3/1997 12:02:00 AM
From: Dulane U. Ponder	Respond to of 97611

if it's the only game in town, better learn how to play it. I agree, steve. there's no way to win against them.

To: hpeace who wrote (10036)	12/3/1997 12:58:00 AM
From: Kai-Uwe	Read Replies (2) \| Respond to of 97611

More manipulation... Quite a clever article, though. Steve, you might have to eat (part of) your words here as below it states that about 60% of CPQ's Q3 Consumer business stems from sub-zero PC sales! Enjoyed your rather heated debate, though! It is educational to all of use as long as it reamins factual (which it has for the most part)... K. COMPAQ: UPBEAT MEETING WITH COMPAQ'S CFO 07:10am EST 26-Nov-97 PaineWebber (Walter Winnitzki) Rating=1 (CPQ) Closing Price=$59 1/8 Current FY EPS EST=$2.65 Next FY EPS EST=$3.30 FY End=December Date:11/26/97 52-wk High: 79 1/2 52-wk Low: 28 3/8 Market Cap: 42,348 Shares Out: 792.0 FY End: Dec. 1996A 1997E 1998E Revenue 20,008.1 24,660.9 30,600.0 EPS Q1 0.25 $0.53A 0.71 Q2 0.38 $0.60A 0.75 Q3 0.48 $0.71A 0.85 Q4 0.62 0.82 1.00 FY 1.72 $2.65 $3.30 P/E 44.7 22.3 17.9 Dividend None None None KEY POINTS: 1. Compaq's CFO very upbeat about current demand and fundamental trends in the business. 2. Demand appears to be strong in most areas with signs that Europe and enterprise systems could provide some upside. 3. Management believes channel inventories are not a problem and reiterates inventory and return goals. 4. We believe Q4, '97 will at least match our expectations and the outlook remains solid. 5. We reiterate our Buy (1) rating, 25% sell-off creates favorable upside. Yesterday, we hosted a meeting with Earl Mason, SVP & CFO of Compaq* (CPQ). The meeting format was a roundtable Q & A discussion of some current issues. We found the tone of management very upbeat relative to fundamental trends and quick to dispell some issues that have recently pressured the stock. On balance, order trends in the current quarter remain healthy. Unit growth was 76% in the month of October with comments that demand continues strong into November. We note that due to the smoothing impact of moving to a build to order (BTO) manufacturing model, unit growth trends should moderate somewhat from these levels during the last two months of the quarter. While there is some softness in Asia Pacific (about 5% of sales) it appears that business in Europe (about 35% of sales) is very strong, running ahead of expectations. This appears to be consistent with our contacts in Europe. Also, from a product perspective, demand appears strongest at both ends of Compaq's product line. While the strength in consumer sales is not surprising, it appears that growth in the enterprise server family is very strong and may also be running above plan. Management noted that it has had to shift production of servers to Europe because of the strong demand. Relative to recent concern that Compaq has seen a recent spike in channel inventory levels to 5-6 weeks, management strongly stated that there had not been any unusual increase and that worldwide channel inventory at about 4 weeks (in the U.S. it is about 6 1/2 weeks) is about as expected at this time in the quarter. Commenting further, management stated that there are always fluctuations and that at this time last year inventory levels were well above 10 weeks. The company's goal of trying to reduce inventory levels to two weeks was reiterated. While we continue to believe this goal may be somewhat aggressive, we believe some improvement is likely in Q4; maybe in the 2-3 week range. Also management still believes that its goal of improving inventory turns from 10 times to 15 times during the quarter is likely. This last goal will be aided by moving to a BTO model on about all of its U.S. and European shipments by the end of the quarter (it is now slightly over 50%). Covering other issues, management reiterated that its $1,000 PC business (about 60% of consumer sales in Q3) is very appealing given its different business model. While after-tax margins of about 4% are well below the corporate average, this is countered by much higher inventory turns (we believe above 100 times) contributing a return on invested capital of over 150% on the product line, which is above the corporate average. Also, the integration of Tandem appears to be on plan with the cross selling of Compaq products by the Tandem sales force building. Management expects that the sales growth from this operation will reach double digit levels for the first time in a while and it will be additive to earnings. Our take on the near-term outlook is that while some cross currents exist, we believe Compaq will at least meet our fourth quarter estimate of $0.82 versus $0.62. We are also encouraged that the pick up in sales in Europe and enterprise systems could favorably impact average selling prices and margins in the period, opening up the door for some modest upside potential. COMPANY DESCRIPTION: Compaq Computer designs, manufactures and markets personal computers for corporate and individual users. The company has the leading positions in the desktop, portable, server and consumer product sectors. Compaq servers are compatible with IBM (IBM $103 1/8) and all standardized applications software. Manufacturing operations are located in Erskine, Scotland, Singapore, Brazil, China, with the headquarters in Houston, Texas. We maintain our Buy (1) rating on the stock and position the shares as our favorite investment vehicle in the micro computer hardware sector. The recent pullback of about 25% in the share price values the shares at about 18 times our $3.30 1998 earnings estimate. We view this pullback as a buying opportunity and highlight our 6-12 month target price of about $90 (using a mid 20s multiple on 1998 earnings) as the outstanding share appreciation potential from these levels.