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

To: Kai-Uwe who wrote (11239)	12/14/1997 9:37:00 PM
From: layman	Respond to of 97611

Korea is up about 6.5%--hopefully this will turn the tech wreck into, well, less like last week. I wouldn't be suprised to see CPQ at 65 by the Santa comes along. Steve

To: Kai-Uwe who wrote (11239)	12/14/1997 10:50:00 PM
From: Kai-Uwe	Respond to of 97611

And still more on the PC Channel inventory 'woes' K. MICROCOMPUTERS: THOUGHTS ON PC CHANNEL INVENTORIES 10:13am EST 11-Dec-97 PaineWebber (Walter Winnitzki) KEY POINTS 1. While this issue came to a head yesterday (12/10) following the comments by one reseller, the issue is not new in that other resellers in the US have voiced similar concerns over the last few weeks that it has been "business as usual" by the major vendors relative to special deals to stuff the channel. 2. While all the major PC vendors are guilty to some degree of this activity, we understand that Compaq* (CPQ $60) appears the most aggressive, followed by IBM (IBM $106 1/2) with Hewlett-Packard* (HP $63 3/4) the least aggressive. 3. Channel inventory issues appear to be mostly occurring in the U.S., with inventory levels for the most part lower in most other areas of the world. 4. The degree that these special deals are still being used is clearly disturbing to even supporters, like ourselves, of new manufacturing and distribution systems (i.e., build-to-order and channel assembly) being implemented by the leading PC vendors and raises the issue of the quality of earnings in the period if sales projections are reached by channel stuffing activities. This is behind the recent selloff in the shares of the major PC companies. 5. The special deals seem to be tied to reaching certain volume levels that emphasize the desire of these vendors to grow their market share to try to leverage certain economies of size (i.e., component purchasing power leverage). Also, we believe that these tools are being used, as opposed to general price reductions, to make their products more competitive in price with some of the major direct vendors like Dell Computer** (DELL $91 1/8). 6. Our contacts with resellers indicate that for the most part these deals are on product not manufactured under build-to-order (BTO) programs. 7. We believe that expectations in the investment community relative to the benefits of moving to BTO manufacturing systems, fueled in large part by aggressive statements by some vendors (Compaq may be most guilty in this case), may have been unrealistic. While investors may have been led to believe that much of the benefits would be present by the end of calendar 1997, we continue to believe that it will take about a full year for all of the true benefits to be realized. Also, we believe that these special deals have been the equivalent of a drug that the major PC vendors have grown used to and hence, are not able to stop cold turkey, especially until BTO programs are fully rolled out. The good news at this point is that this perception may now have been corrected and that there are still significant benefits yet to be realized, albeit more slowly than previously expected. 8. Despite these deals, we believe that there will be some modest improvement in channel inventories during Q4 from the approximate 6-7 week levels that persisted during Q3 in the US (inventories are lower in other geographies). Relative to last year, notable progress has been made (when US inventories were 10 weeks or more). However, we believe that the goals of Compaq, clearly the most outspoken of the major PC vendors, including reaching 2 weeks of worldwide channel inventory and targeting 15 inventory turns in Q4, may prove too aggressive. 9. Helping to give us confidence that we will see some improvement in the level of channel inventories in the US in Q4 is very healthy end user demand trends in both the commercial and consumer markets. Our contacts with a number of the major US resellers in the commercial market indicate that overall demand has either remained strong into December or improved from earlier in the year. This should help move out this inventory in the channel. However, it highlights a potential risk if demand trends should weaken later in December. If channel inventories are too high entering 1998, prices will have to be cut to move it through, necessitating large price protection costs for resellers. 10. While the shares of a number of resellers were pulled down by these concerns, with some getting even hit harder than the PC vendors, we believe that this may be an over reaction. We note that if excess inventory were to build in the channel the major resellers may be less impacted than the vendors. They all have return policies or more likely will be give price incentives with price protection guarantees to move the products out.