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

To: TLindt who wrote (19924)	3/6/1998 3:28:00 PM
From: TechMeister	Respond to of 97611

PC Industry Outlook: Near-term Pain, Long-term Gain By Richard Melville NEW YORK (Reuters) - Growth trends for personal computer makers are expected to remain intact despite a painful start to 1998, analysts said. Already, wrenching industry transitions and narrowing profit margins have led industry bellwethers like Compaq Computer and Intel to counsel analysts to lower expectations for the first quarter. But analysts said most of the assumptions underpinning expectations of annual double-digit unit sales growth at the start of the year still hold true even after Intel's warning that weaker PC demand, too much inventory and manufacturing changes at PC makers would cut into its financial results. In the wake of the Intel warning, research firms Dataquest and International Data (IDC) reviewed their forecasts for worldwide PC sales growth. After reviewing data and checking with channel sources, neither expected to make major changes. "The Intel news, in and of itself, doesn't make us change our long-term assumptions of industry growth," said IDC senior analyst Kevin Hause. "We've been in contact with some key people and they're just not seeing any fall-off in demand." Evidence that PC orders remained strong came in late February when Dell Computer, whose fiscal quarter ends a month later than most PC companies, solidly topped Wall Street estimates with its profits and sales. So how can bellwethers like Intel and Compaq both be suffering and yet the industry remains healthy? Analysts said a combination of factors helps explain the apparent paradox. First, this quarter is seasonally one of the weakest and, in contrast to last year's release of Intel's MMX-technology, there are no major product upgrades boosting sales. Also, Asian sales remain depressed due to the region's economic turmoil. At the same time, companies like Compaq have become victims of their own success in pushing prices for consumer PCs well below $1,000, a shift that is eroding profit margins and forcing a tighter focus on costs. But, while all those factors combined have resulted in a difficult near-term environment for some PC makers, analysts do not expect any of them to do lasting damage. "Fundamentally there are some shifts going on and short- term, there will be some winners and losers," said Bill Schaub, vice president of research at Dataquest. "But it's a mistake to look at this one quarter in isolation." One of those shifts is hurting Compaq, which is in an ongoing struggle to reduce the amount of computers sitting in "the channel" as inventory at resellers and retailers. Direct sellers like Dell and Gateway 2000 produce machines in response to orders, removing the possibility of an inventory backlog. Compaq has missed several internal target dates to cut that inventory to three weeks of sales to better compete with the direct sellers and now plans to complete the project by June. However, inventory levels are currently nearly double that, industry sources estimate and reduction efforts will likely entail a near-term slowing of deliveries by Compaq, a process that may already be reducing its need for Intel processors. Much work remains, given the state of affairs at resellers. In one example, inventories at Vanstar, which resells PCs through its technology consulting practice, rose to $515 million from $462 million in the quarter ended January. The inventory -- comprised almost wholly of IBM, Compaq and Hewlett- Packard computers and a variety of peripherals -- was higher than Vanstar had planned on, said investor relations representative Christine Mohrmann, and was linked to incentives and other efforts by PC companies to ship computers out of their own inventories and into the channel. Both Dataquest's Schaub and IDC's Hause expect their new forecasts will call for a worldwide personal computer unit sales growth rate in the low-teens. That would be even with IDC's forecast entering the year and a couple of points below Dataquest's.