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

To: Harry Landsiedel who wrote (11095)	12/12/1997 12:02:00 PM
From: Douglas Rushkoff	Read Replies (1) \| Respond to of 97611

Sorry to be stupid: Why do they mention a 12/31 date in connection with a January split?

To: Harry Landsiedel who wrote (11095)	12/13/1997 2:11:00 AM
From: Kai-Uwe	Read Replies (2) \| Respond to of 97611

Harry: Thanks for your kind words! Kai Thread: I wasn't able to post this yesterday as I didn't have enough time. More encouragement regarding the channel-situation for CPQ. BTW, look how the overall NYSE trend was defied by CPQ yesterday - may that be a telling sign for future performance? Comments welcome! K. CPQ: Inventory Issue Looms as Larger Investor Issue after MicroAge Commentary 04:50pm EST 11-Dec-97 CIBC Oppenheimer (James Poyner ) Investment Conclusion We continue to rate the stock Hold, although recent price declines attributed to further sector concerns about Asia and growing awareness of inventory issues in the industry are increasing the stock's attractiveness. Below $55, we think enough upside could warrant more aggression. As the drama of inventory excess in the computer industry continues to unfold, Compaq has become an interesting source of concern in recent weeks. As far back as July, we have written that our 30-stock index of computer suppliers, manufacturers and distributors looked bloated in terms of inventory excess, with the most shocking levels being in the disk-drive area. The subsequent collapse of those stocks has heighten investor sensitivity to inventory issues in general, we believe. A few weeks ago, concern arose in Compaq's case that, despite its months' long effort to reduce inventory at both the distribution and manufacturing levels through its much-publicized build-to-order system, that channel inventory remained, at five to seven weeks, above company goals of about two to three weeks. That concern was exacerbated Wednesday when MicroAge (MICA--OTC $16 7/8, not rated) missed its earnings forecast for its Nov. 2 quarter and commented on its conference call that it had a higher inventory of Compaq product than it expected and that Compaq recently had approached it about taking still more. We have noted in industry pieces that Compaq's inventory turnover has remained surprisingly stagnant at about 9.5x for the past three periods. This lack of improvement is despite its build-to-order efforts designed to lower overall inventory levels and its rapid growth in the low-price segment that carries an almost infinite turnover because Compaq, as a rule, outsources the manufacturer of the cheapest systems and doesn't hold physical inventory for those systems as a result. While the turnover is not bad in absolute terms--after all, it's about the same as the turnover in last year's third quarter at 9.4x versus last year's 9.2x--investors have been expecting an improvement. Management continues to state publicly it has not changed its goal of exiting the fourth quarter with a turnover of 15x. From a seasonal standpoint, this goal is achievable; but the MicroAge statements have cast some doubt on that likelihood. The company has not returned our phone calls on the subject, so we don't have anything to add from Compaq's viewpoint. The bottom line is this: At $0.80, we are slightly below consensus on our estimate in 4Q for Compaq. The reasons for this include this lack of inventory progress thus far thus negates upside bias if inventory reserves ultimately rise, the nightmare inventory levels in the disk-drive business that in the past have pointed toward increased margin pressure for PC manufacturers in general, the slowing in the notebook segment in particular, and the Asia/Japan turmoil that on the margin doesn't help any vendor on the upside. In our opinion, Compaq's formidable strengths remain a relatively healthy server business; a very large, high-margin options business; and a long-term vision of being a more complete enterprisewide supplier that may ultimately encompass further acquisition in the networking and services areas. We think a toe-in-the-water purchase strategy under $55 is a decent calculated bet, with a more aggressive posture in the $40s. But we reiterate that the tech sector in general, and the computer suppliers specifically, are in a correction from overvalued levels in the summer to more normal historical ranges because investors are increasingly aware that high unit growth rates needed to offset declines in average selling price may be more difficult to maintain as demand slows in Asia. We view Compaq as a long-term winner facing the shorter-term turmoil of the marketplace. Our quarterly EPS estimates are shown below. 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Year 1996 Actual $0.34 $0.38 $0.50 $0.66 $1.86 1997E Current $0.53A $0.60A $0.71A $0.80E $2.65E 1998E Current $0.72E $0.78E $0.84E $0.96E $3.31E