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

To: David Tesorero who wrote (11236)	12/14/1997 9:31:00 PM
From: Kai-Uwe	Read Replies (2) \| Respond to of 97611

More regarding this: K. CPQ/ CONCERNS OVERDONE, REITERATE STRONG BUY; VISITING LATER TODAY 07:53am EST 12-Dec-97 Cowen & Co. (CHU, RICHARD) Rating: Strong Buy (1) CONCERNS OVERDONE; REITERATING STRONG BUY; VISITING LATER TODAY ================================================================= EPS PE Quarterly EPS Q1 Q2 Q3 Q4 F96 1.71A 0.32 0.30 0.48 0.63 F97E 2.70 20.7X 0.53A 0.60A 0.71A 0.85 F98E 3.50 16X 0.70 0.80 0.90 1.10 F99E 4.35 12.8X ================================================================ 780MM shares; Market Cap = $43.6B; TTMRevs = $22.2B *Recast for TDM pooling. Key Points: 1. Concerns are overblown: Demand is strong; channel "buy-ins"/promos focused on pre-ODM options. 2. Channel inventories are above September levels but should decline by end of Q4 as ODM rollout continues to widen. 3. Visiting with CPQ management today; Maintain strong buy at just 16X C98, <13X C99. Bottom line - The global PC business will continue to consolidate and CPQ will be a major driver and beneficiary of this consolidation. Jitters over the short-term picture presents a compelling entry opportunity since we expect 25%/annum EPS growth over the next several years; return to recent highs would drive 35% upside near term. 1. Investor concerns are overblown - Recent heightened investor concerns vis-a-vis CPQ's channel inventory picture and, by implication, concerns re demand, are overblown. Demand, overall remains strong, with stronger dynamics in Europe offsetting any incremental weakness in Asia Pacific (8% of sales). Global channel inventories (in the commercial arena, not retail) at the end of Q3 were just a little over 5 weeks (a tad above June); they are currently running closer to 6 weeks and we acknowledge that management may or may not be successful in paring them to the previously articulated goal of 2-3 weeks. We would expect year-end channel inventories to decline from Q3 levels, perhaps to 3-4 weeks, and in any event, these should be dramatically lower than the 8-10 weeks extant a year ago, and even higher levels characteristic of early 1996. That said, the asymptotic goal of 2 weeks was portrayed as a goal following successful implementation of the new ODM (optimized distribution) model and there is little question that the ODM model is still in the ramp-up phase with commercial BTO products launched in early July but deployment of CTO (configure to order) and channel assembly commencing only very recently. In the case of the portables product line, the first of the BTO products (high end 7000 class Armada was launched just last month, and full cutover to ODM will take longer. In addition, pending the full implementation of the ODM model, "buy-ins" (promotional allowances, taken as revenue contra items) to the channel can be expected to continue for slower moving items, product transition items, etc.; most of the current "buy-ins" center around non-CPU option items (e.g., monitors). Compaq's revenue contra line has been running about 12-13% of sales in recent quarters --- as ODM is deployed more fully, cuts in promotional allowances, price protection, etc., should drive a reduction of contras to perhaps half current levels. 2. Visiting with management today; maintain strong buy - We will be visiting with management of Compaq later today; in the meantime, we think this pullback presents a compelling opportunity to step in, as CPQ goes through a transitional phase in implementing its ODM model which, by definition, will be driving improved channel and asset models incoming months