JDN: Since Ron the Bear is on vacation, does that mean we don't get to see Jerry Favors today? Maybe we'll get a nice push at the close.
K
PS: Hot off the presses from the.Church.com:
'If you wait until you receive word from the company, you are just going to regurgitate what they say.'
-- Ashok Kumar, Piper Jaffray
The Ax: Holidays Offer Mixed Tidings at Compaq, Gateway
By Eric Moskowitz
Staff Reporter
12/4/98 2:35 PM ET
In the PC business, it's all about inventory -- especially during the holiday season.
Last year at this time, Dan Niles, at what was then BancAmerica Robertson Stephens, presciently warned investors that Compaq's (CPQ:NYSE) inventory channel would back up. He was proved right as PC makers slashed prices to unload inventory.
Now it's the all-important holiday season once again, and PC companies have already placed their bets on strong demand from consumers. Compaq's prospects look good, explains Niles, who is still TSC's ax, though his firm's name has changed to BancBoston Robertson Stephens. (The firm has done no underwriting for Compaq.)
"Given all the debate on whether Compaq can get it together, we are starting to see momentum build in the fourth quarter," says Niles, who upgraded Compaq from a buy to a strong buy Thursday. He argues that PC average selling prices "are flat to up" in this quarter, and November proved to be a record month of production for the Houston-based company. Compaq's stock is up 17% since Tuesday. Shares were up 1 11/16, or 4.6%, at 38 1/16 Friday.
Unlike last winter, when the industry had what Niles calls a "recipe for disaster" -- rapidly declining PC prices combined with lower demand due to the Asian contagion -- there is now an undersupply throughout the channel. PC vendor Tech Data (TECD:Nasdaq) reported Tuesday that it is having problems getting its hands on enough boxes.
"I'm pleased as heck that they are having shortages," exclaims Niles, noting that Tech Data is very close to the customer end and thus has a good read on demand. This also should help Compaq's first quarter, Niles explains, because customers won't be able to get PCs until 1999. For PC companies, the first quarter is traditionally much slower than their fourth quarter.
Niles predicts Compaq will earn 40 cents a share in the fourth quarter, somewhat below last year's 43 cents a share but above the consensus estimate of 36 cents. "This is a pretty tough quarter for Compaq, but I wouldn't have upgraded the company if I didn't think it was having a great quarter," Niles said.
Due Diligence Pays Off for Kumar
It's been an interesting week for Piper Jaffray's Ashok Kumar. On Monday, he came out with a negative report on Gateway (GTW:NYSE) headed with the line: "The Grinch that stole Christmas -- weak unit shipments could result in Q4 revenue and earnings shortfall." Kumar's sources warned that Gateway's fourth-quarter unit growth was tracking well below the company's guidance level of 40%. The news hit Gateway's stock like a thunderbolt: It fell 9% Monday.
It also set off a storm on the Silicon Investor Gateway thread. While there were a number of "Down with Kumar" missives, there were also, surprisingly, some positive words for Kumar. "Earlier [Kumar] was mocked and jeered on this thread, only to prove that he was right," wrote MMV on Dec. 1. "In the last six years, I haven't seen a single sell-side analyst who said that a company may miss estimates even after the company touts said otherwise. Ashok Kumar is an exception."
On Wednesday, there were also some strong critical words from our columnist James Cramer: "When Western Digital (WDC:NYSE), which has been as downbeat as a Russian tax collector, announced that business had gotten better, you could sense the noose tightening on the extrapolators of Kumar's Gateway call." Touche.
By Thursday, it seemed as if Kumar was going to have to eat his words. Gateway's presentation at Credit Suisse First Boston was well received by money managers. But in the afternoon, Gateway fans received another shock, from none other than Credit Suisse First Boston hardware analyst Michael Kwatinetz. "Revenue could be as much as 5% short of our 20% growth estimate unless Gateway has very strong closings and shipments in December," wrote Kwatinetz Thursday. "Demand in October and November was slightly weaker than the company expected."
Kwatinetz, who maintained his buy rating on Gateway, still thinks the company can meet his -- and First Call's -- fourth-quarter earnings estimate of 78 cents per share, since better gross margins from stabilizing average selling prices could offset this potential revenue shortfall. The report, which echoed Kumar's concerns about revenues, sent Gateway shares tumbling 11% Thursday afternoon.
Kumar expects Gateway to earn 72 cents a share in its fourth quarter. "I guess my due diligence is paying off," he says. Kumar has been eerily accurate on a number of calls this summer and has been ahead of the crowd on Gateway this week. While some argue Kumar is just trying to make a name for himself, he says that most analysts wait too long to report what news they have to clients. "If you wait until you receive word from the company, you are just going to regurgitate what they say," he explains. "Many times as an analyst you can't wait till you have all the facts."
Gateway officials weren't immediately available for comment, but they can't be too happy with Kumar, who sent what was a highflying stock -- up 17% from Nov. 13 to Nov. 27 -- sharply lower this week. It's down 16% this week alone and was trading up 1/2 at 52 1/4 Friday. "I don't care what the company says about me," says Kumar. "But I also don't want it to make it a personality match -- what's important is the company's long-term outlook."
For the record, Kumar is still giving Gateway "the benefit of the doubt," maintaining what may be the weakest buy rating in the history of Wall Street. |
