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

To: ed who wrote (10991)	12/11/1997 8:16:00 PM
From: Kai-Uwe	Read Replies (1) \| Respond to of 97611

And more news... These guys seem to feel that the 'channel problem' is not a problem K. CPQ: Buildup Of Inventory Levels In U.S. Distribution Channel 01:50pm EST 11-Dec-97 Credit Suisse First Boston (Wolf, Charles) OPINION: BUY / FOCUS LIST Compaq Computer (CPQ) Summary The buildup of inventory levels in the U.S. distribution channel chiefly reflects promotional sales associated with Compaq's move from a build-to-inventory to a build-to-order model rather than a weakness in demand. Maintaining 1997 and 1998 estimates and a 12-month price target of $87. Price Target Mkt.Value 52-Week 12/10 (9 Mo.) Div. Yield (MM) Price Range $60 $87 None $47,358.0 79 9/16 - 28 3/8 Annual Abs. Rel. EPS P/E P/E 12/98E 3.45 17.4X 87% 12/97E 2.70 22.2 103% 12/96A 1.88 31.9 128% March June Sept. Dec. FY End 1998E .74 .78 .91 1.03 Dec. 31 1997E .54A .58A .72A .86 1996A .30 .39 .52 .62 ROIC (9/97) 43.5% Total Debt (9/97) $0m Book Value/Share (9/97) $9.63 WACC (9/97) 12.7% Debt/Total Capital (9/97) 0% Common Shares 789.3 mil. EVA (Trend) Up Est. 5-Yr. EPS Growth 17% Est. 5-Yr. Div. Growth NA 1On 12/10/97 DJIA closed at 7978.79 and the S&P 500 at 969.79. Compaq Computer Corporation, a Fortune 100 company, is the fifth largest computer company in the world and the largest global supplier of personal computers. Summary and Investment Recommendation Concern has grown that demand for Compaq's products in the U.S. business market are not meeting the company's internal forecasts because inventories in the U.S. business distribution channel have risen from their September levels. With the move from a build-to-inventory to a build-to-order manufacturing and distribution model, Compaq predicted that inventories would fall by the end of the quarter. This now appears highly unlikely. Overall channel inventories have risen about a week since the end of September to around six weeks of sales world-wide. To place this in perspective, inventories were about twice as high a year ago. A number of distributors have noted that Compaq has recently offered them products at promotion prices, which are typically a percent to a percent and a half below listed wholesale prices. Our interpretation-confirmed by the company and one corporate reseller-is that Compaq is mostly blowing out old inventory manufactured under the build-to-inventory model to clear the channel for new products manufactured under the build-to-order model. As evidence that the promotions are not demand related, in the past, vendors typically engaged in promotions in the last week of a quarter to "make their numbers". Since Compaq still has three weeks to go before they close their books on the year, we believe that the promotions are unlikely to be part of a conspiracy to "stuff the channel". Compaq began the roll-out of its build-to-order model in July on three desktop models. But it completed the transition to all products in the U.S-from notebooks to servers-just in the past week. It should be noted this applies only to the business market. Products sold through retail outlets to home buyers have and will continue to be manufactured on a build-to- inventory basis. In our opinion, the real problem stems from Compaq's guidance earlier this year that as the build-to-order model rolled out, channel inventories would fall, not rise. We regard such guidance as naive, especially within the context of the obvious transitional issues noted above and the traditional seasonal buildup of inventories in the December quarter. What appears at stake more than the inventory issue is the credibility of the company in this regard. The key point to remember is that the inventory buildup is not a demand problem. Demand for Compaq's products remain strong. The company noted that sales of high end, high margin servers and workstations are especially strong and that European sales are the strongest in two years. Although the company did not cite consumer sales, these also appear to be booming, according to independent sources. Recent events do point out that moving from a build-to- inventory to a build-to-order manufacturing/distribution model is not a trivial exercise. It requires a complete reengineering of the supply chain. And it requires a new buying psychology among vendors, dealers and customers. We anticipate that by mid-1998, most if not all of these frictional issues will be resolved when the build-to-order transition is completed worldwide. We continue with 1997 and 1998 earnings per share estimates of $2.70 and $3.45 respectively.

To: ed who wrote (10991)	12/11/1997 8:17:00 PM
From: Kai-Uwe	Respond to of 97611

This is the guide on how to buy a stock cheaper (re: the 500k stocks bought today by DLJ). K. COMPAQ COMPUTER CORP: Removed from the Recommended List 07:29am EST 11-Dec-97 DLJ Securities (Kevin A. McCarthy) COMPAQ COMPUTER CORP. (CPQ: $60) Removed from the Recommended List 1997 vs 1996A % Chg EPS P/E F1QA .53 vs .32 +66% 1998E 3.50 17.1 F2QA .60 vs .30 +100% 1997E 2.70 22.2 F3QA .71 vs .48 +48% 1996A 1.72 34.9 F4Q .86 vs .63 +37% Yield: 0.2% Market Cap.: $58.6B 5-Yr. Growth Rate: 20-25% Dividend: $.12 Avg. Trading Vol.(000): 10,000 Book Value: $10.82 RATING: Buy Change: Down From RL Buy 12-Mo. Target: $87 INVESTMENT VIEWPOINT We have removed Compaq from the Recommended List based on growing evidence that the company is offering large inventory "buy-ins" to the US corporate dealer channel. We believe these "buy-ins" match or exceed the level of those offered during the September quarter. "Buy-ins" run counter to the company's move to a Build to Order (BTO) distribution model. Under BTO, Compaq ships product into the channel to match a customer order, not to build stock. While we did not expect BTO to happen all at once, the transition to the new model is below our expectations. Compaq has made measurable progress in inventory management on a year over year basis but evidence of large "buy-ins" in December suggests that the company may not achieve its year-end BTO goal set forth in July. We believe BTO will ultimately prove successful but may take several quarters to fully implement. Major US resellers are currently deciding whether to participate in the current "buy-ins". Compaq will have to make the "buy-ins" attractive economically since the channel feels comfortable with the current volume of inventory at their warehouses. Large "buy-ins" initiated this month will make the channel less receptive to BTO goals in Q1. The good news is that end user demand trends remain healthy. Demand from corporate users remains strong and has shown signs of increasing during the quarter. A highly fragmented PC market allows companies such as Compaq gain share and enjoy high rates of unit growth as the company leverages its product scale, balance sheet, and supplier relationships. We remain positive on Compaq's long-term outlook and have not changed our estimates.