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

To: Elwood P. Dowd who wrote (18520)	2/28/1998 2:29:00 AM
From: Obewon	Respond to of 97611

I'm not sure whether CPQ will be able to take any sort of charge for the merger until it is completed in the second quarter. I can say with certainty that CPQ has merger related expanses in the first quarter but don't know if they have to wait until the completion of the deal to take a partial charge. I can also say with certainty that CPQ gross margins will expand this quarter. Has anyone else noticed that prices have not been dropping at the same rate as we experienced in 4Q97? Some of you may remember that it was posted (about 1200 posts ago) that for most of the fourth quarter CPQ was stuck in a long term component supply agreement, only having it expire in mid December. Following expiration CPQ could capture the drop in component prices which had occurred since the contract began. However, with about five weeks of inventory in the channel, that meant that NONE of the results of the price drop in CPQ's raw materials were factored into the 4Q97 numbers (CPQ accounts for material costs on a first in - first out basis meaning that the PC's sold in early December would have a cost of materials based on CPQ's cost back in early November). At the time steve (who changed his handle to hpeace and I suspect left for the Dell thread but still lurks here. I last heard from him on Feb 11) claimed that CPQ would probably pass most of the drop in material costs to consumers further driving down the price point of the sub-1000 computer. While CPQ has lowered prices on some of its Presario line, we haven't seen the cut after cut we were seeing in the fourth quarter so I suspect that much of this drop in CPQ's cost will drop straight to CPQ's bottom line this quarter. Found my previous post on the matter and repost it here. <<To: +ed (14763 ) From: +Obewon Saturday, Jan 24 1998 3:09AM EST Reply # of 18525 Anybody who wants to talk COMPAQ vice politics please answer the following question: How will CPQ do this quarter? I have a couple of thoughts (well only one actually related to CPQ). Per its press release, CPQ has not been able to take advantage of recent component price drops because of long term supply contracts which apparently only ended in mid-to-late December. Does anyone (hpeace???) know how long CPQ signs these contracts for? This is critical to determine the extent of cost savings per computer CPQ will see in this quarter. For example, if computer component parts have dropped 20% (not to unreasonable for the last six months), CPQ has been locked into the higher component prices, and computer prices have fallen 20% in the same period, them it would be logical for CPQ's margins and earnings to decrease. However, we actually saw them increase during this period. That leads me to conclude one of two possible scenarios: 1) CPQ numbers and statements are false and they managed to fool their auditors and the public. 2) CPQ has achieved phenominal productivity and economies of scale gains. (My personal choice) Using my scenario, CPQ should see a 20% drop in cost of product in the current quarter. The key to this is that this 20% drop in costs should equal a 20% rise in gross profit which should fall directly to the bottom line (meaning that CPQ's net margins have the potential to perform a step increase to near 45%). This of course assumes that the current pricing environment stays relatively stable (meaning that computer prices fall no faster than component prices). Anyone else want to point out the flaws in my argument? OB >>