Trashing CPQ. (cribbed from Yahoo! AAPL)
RodgerRafter Jul 27 1998 1:09AM EDT
>Last week I dissed IBM and Dell. This week I'll go after CPQ
and GTW. With Compaq especially, there is much to mock. This
post is really long, so just skip it if you really don't
care.
Compaq rose to prominence by underselling IBM, and
establishing themselves as a marketshare leader in both the
Corporate and Consumer markets for PCs. However, CPQ never
really did much in the way of developing inovative products,
they effectively remained a commodity producer.
Through the mid 1990s, this wasn't a problem. Demand for
Wintel PCs grew rapidly, and Compaq was content to grow
steadily while maximizing margins and short term profits.
However, this left room for smaller box makers, like Dell
and Gateway, to price their products more aggressively and
experience rapid earnings growth, while chipping away at
Compaq's market share. Compaq didn't care though, because
margins were still very high and there were plenty of
profits to go around.
Around the third quarter of last year, all the box makers
seemed to shift more of their focus from margins to
marketshare within a short period of time. Sony and Toshiba
decided to invade the desktop market. Dell decided to borrow
$500,000,000 and build more production facilities. IBM, CPQ,
HWP and others created the sub <$1000 market and adjust
their business model for greater production. Suddenly, a
sellers market for Wintel PCs started turning into a PC
glut. On top of this, Microsoft failed to provide sufficient
bloatware that would force established Wintel users to
upgrade.
At first, Compaq tried to hide the fact that sales were
going south. They forced a great deal of surplus inventory
into the distribution channels, so that they could maintain
their earnings growth. Of course that caught up to them
these past two quarters, as they've earned a grand total of
3 cents per share before charges, and a great deal of
creative accounting was necessary even to show that dismal
profit.
Compaq realized that the market for Wintel PCs was becoming
far too competive to guarantee good profits, so they decided
to cash in on their prominent market position and
over-inflated stock price (while they still could) and
acquire Digital. They did this to improve the "services"
they could offer.
Now, whenever the buggy Windows 95, 98 and NT crap they sell
breaks down, they can sell "services" to their customers and
make large profits cleaning up the mess. This has become the
dominant business model in the Wintel world in the last few
years. A very good (programmer) friend of mine often
consults for a software firm that "sells bad software" to
companies, then charges a bundle for the support staff that
maintains it. Microsoft charges almost as much for support
as they do for their products. Dell has a partnership with
Wang for "services," and of course "services" are IBM's
fastest growing and most profitable area. With the Digital
acquisition, Compaq now has the potential to capitalize on
this growing market.
Compaq and Digital put their best minds together and came up
with the brilliant slogan: "Now that Comapaq and Digital are
one, the way the world views computing will be changed
forever." Perhaps CEO Pfeiffer thought that one up all by
himself. You hear it during the credits at the beginning and
the end of every "Nightly Business Report" on PBS.
Sponsoring NBR payed off nicely, a couple of Wednesdays ago,
when Compaq announced their terrible 2nd quarter earnings.
NBR talked about how the $32 million dollar "profit" beat
analysts estimates by 2 cents per share, and didn't even
mention the $3.6 billion dollars in 2nd quarter write offs.
Compaq also got considerably more coverage than Apple, which
had blown away analysts estimates by 47% that day. (If Apple
had been a sponsor, they probably would have devoted the
whole show to us.)
NBR interviewed analyst/ho Lou Mazzuchelli, who will say
anything to get himself on TV or in print. Mazzuchelli gave
a sly little smile and said that the Compaq earnings were
good considering the challenge of integrating Digital into
their organization. Of course every possible negative result
attributable to the Digital deal was written off, so that
Compaq would be able to report a puny, 2-cent profit.
$291 million worth of the write-offs were a result of the
closing down of Compaq's facilities. This was done mainly
because Compaq was having a hard time selling their own
computers, not because of any redundancies with Digital's
operations. However, Compaq did their best to hide these
details.
To Compaq's credit, the consumer machines selling in retail
outlets like CompUSA are very attractively priced, even if
they are ugly to look at. The models, ranging from $899 to
$2499 (without monitors), include 2 USB ports, mounted in
the front of the mini-tower, which puts them a good step
ahead of most of their wintel competition. Some of the
consumer models even come with DVD-2 drives and Apple's
firewire, and all of them feature some form of 2D and/or 3D
graphics acceleration.
Compaq's problem has not been their consumer lines, which
have been selling very well. I learned from their rep, who
was setting up the demos in CompUSA, that they've had an
especially hard time unloading their corporate line of
computers. Inventories for the combined Digital/Compaq
creature have increased over 40% since the beginning of the
year, despite Compaq's claims that they've gotten inventory
down to target levels. By contrast, Apple's inventory is
only $129 million, while Compaq's is over $2 billion.
(Compaq should be able to count on depreciation to bring
this number down by the end of the year. heh, heh.)
Another thing Compaq has going for it now are $2.482 billion
in deferred taxes, thanks to their huge losses this quater.
If earnings remain constant, Compaq won't have to pay taxes
for almost 20 years. Of course, these deferred tax assets
(23.5% of their book value) don't generate any income, but
they could make Compaq an appealing takeover target for some
more profitable company somewhere down the road. ;-)
Compaq's equity is $10.566 Billion, but you may as well
ignore the tax assets, which leaves $8.084 Billion worth of
revenue generating equity. That would give them an effective
P/B ratio of about 5.75. However, the averaging method
Compaq used for computing shares outstanding used June 11th
as the date of the merger and didn't count 136 million of
the shares that were given to previous Digital shareholders
as part of the buyout. Once those shares are factored in,
P/B is more like 6.33. That's just a tad high for a
commodity producer like Compaq.
Go AAPL.
200 by 2000.
Rodg< |
