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

To: William Hunt who wrote (28018)	6/23/1998 1:27:00 PM
From: William Hunt	Read Replies (3) \| Respond to of 97611

ELWOOD , STEVE ---- Very positive article on CPQ --- Dow Jones Newswires -- June 23, 1998 SmartMoney: Street Smart - A League Of His Own This story appears in the July issue of SmartMoney magazine. By David B. Lipschultz Growth in PC sales is slipping, and corporate clients are demanding more customer service than ever before. That's why this former sportswriter looks for computer firms flexible enough to thrive despite an industry slowdown. WHO James Poyner Jr., 42, a former sports reporter who went into business writing in 1981 after getting "sick of the jocks." In 1983 he joined Dallas firm Rauscher Pierce Refnes as a technology analyst. Ten years later he moved to CIBC Oppenheimer as an analyst, where he now is in charge of computer and data-storage coverage. RECORD Up 93 percent for 1997, compared with 41.6 percent for the hardware subset of the Goldman Sachs Technology index, Poyner has shown a knack for picking well in a volatile sector. He is a three-time Wall Street Journal All-Star Analyst in PCs and peripherals, and his stock picks last year returned a whopping 314 percent. It would be easy to dismiss such large returns as sector fortune, considering highfliers such as Dell are in his venue. But he also has a knack for calling downturns. With Compaq, for example, Poyner spotted inventory problems as far back as last July and downgraded the stock to a hold shortly after. His move paid off when the giant PC maker announced it would miss earnings estimates for the first quarter of 1998 due to a high inventory backlog. The stock price dropped more than 15 percent. PHILOSOPHY It's a misnomer to call PC makers technology companies, says Poyner. They are assembly companies whose success depends on how well they assemble and move products into the distribution channel. He learned early in his career that to succeed, companies must manage their inventories properly. When he sees that raw cash flow is dwindling, he knows earnings will get hit. He concurs with the conventional wisdom that PC growth is declining, but even more troubling for Poyner is the popularity of the sub-$1,000 computers. This trend has lowered the average selling price of computers over the past year, cutting into the profit margin of all the major PC makers. Thus, Poyner is betting on the PC companies that offer the most value-added elements, such as computer installation, networking and other computer services. STOCK PICKS Poyner has reversed course and become bullish on Compaq (NYSE: CPQ, $29.31) these days. Why? Its $9.6 billion acquisition of Digital Equipment. Thanks to Digital's $6 billion computer-service business, Compaq is suddenly a major player in this fast-growing, profitable area of the PC industry. His 12-month price target: $40. At least one old-guard blue chip, IBM (NYSE: IBM, $124.63), is near the top of Poyner's list. Of all the PC vendors, IBM has the largest service component, accounting for 25 percent of Big Blue's revenue. Computer services, with a growth rate of 22 percent, is easily outpacing the sluggish PC business. IBM's 125,000 service workers make the old mainstay look attractive, says Poyner. His 12-month price target: $150. Hard-drive maker Western Digital (NYSE: WDC, $19.00) is due for a comeback, says Poyner. The company, which got slammed last year by overproduction and decreasing PC demand, is near the absolute bottom, he predicts. What's more, the firm has begun moving inventory faster. Inventory turnover, an indicator of how fast inventory turns into sales, has gone from 12.3 turns in December to 14.6 in March. His 12-month price target: $29. Though its name has become synonymous with corporate (and shareholder) success, Dell Computer (Nasdaq: DELL, $94.50) is in Poyner's doghouse. No, not because it's so notoriously expensive (price/earnings ratio: 64). Rather, Poyner believes the company isn't moving to where the revenue growth is: services. It's true that Dell is rapidly gaining market share in PC sales, but the margin on all those additional PCs is shrinking. A Texas native, Poyner was one of the first analysts to follow Dell. Despite his Lone Star pride, he firmly believes the company will suffer badly from decreasing profitability in the PC business. BEST WISHES BILL