Hi Victor,
My excuse for posting on a Sunday is that it is a normal working day for me here.
What's yours? <g>
I did not see the text of the ML report posted anywhere, so FWIW,
here it is:
COMPAQ COMPUTER: Quarter on Track
07:45am EST 4-Dec-98 Merrill Lynch (S.Milunovich/K.Campbell)
NEUTRAL*
Long Term
BUY
Estimates (Dec) 1997A 1998E 1999E
EPS: $1.35 $0.46 $1.70
P/E: 27.4x 80.4x 21.8x
EPS Change (YoY): -65.9% 269.6%
Consensus EPS: $0.46 $1.75
(First Call: 01-Dec-1998)
Q4 EPS (Dec): $0.42 $0.35
Cash Flow/Share: $1.70 $0.80 $2.03
Price/Cash Flow: 21.8x 46.3x 18.2x
Dividend Rate: $0.06 $0.06 $0.06
Dividend Yield: 0.2% 0.2% 0.2%
Investment Highlights:
o Compaq appears to be on track to make our estimates of $0.35 with possibly
slight upside. We think the stock is fairly valued given much to do in
integrating Digital.
o The stock is up 10% this week, in part due to speculation that Compaq
could spin off Alta Vista. If we assume a revenue run rate of $150 million, a
7-8X price-to-sales multiple would give Alta Vista a market capitalization of
over $1 billion.
Fundamental Highlights:
o Upside to our number is possible and would most likely come from lower
SG&A expense, which could result from Compaq quickly and cleanly continuing its
layoffs (5,000 more this qtr).
o Compaq is seeing good demand in both Europe and North America. Japan's
commercial business is a bit better though Asia Pacific as a whole is still not
showing any signs of recovery. Business in Latin America is mixed.
o Retail PC sales are very strong; Compaq says it had record retail sales
over Thanksgiving.
Quarter On Track
Compaq seems to be on track to make our estimates for the December quarter. We
are looking for EPS of $0.35 (down 18% pro forma year over year) on sales of
$11.0 billion (up 3% pro forma year over year), gross margin of 26.7% and
operating expense ratio of 19.1%.
Compaq is seeing good demand in both Europe (36% of sales) and North America
(50% of sales). Japan (4% of sales) has seen improvement in its commercial
business. China and India are doing well, though Asia-Pacific as a whole (7% of
sales) is still not showing any signs of recovery. Latin America (4% of sales)
is mixed.
Retail PC sales (15% of sales) are very strong, and Compaq says it had record
retail sales over Thanksgiving. According to our retail analyst Peter Caruso,
PC comps at Radio Shack were down 19% in November, which could be a bad signal
for Compaq (Radio Shack sells Compaq PCs exclusively). However, we believe
this was due more to market share shifts on the retail side rather than weak
end user demand. Radio Shack did not advertise Compaq's $599 PC as
aggressively as some other retailers, which apparently was the sweet spot for
the weekend. Apparently, Radio Shack December PC sales are back on plan for
mid-single digit comps. We expect sub-$1,000 PC's such as the $599 model to
increase slightly as a percentage of consumer units this quarter, up from 54%
in the September quarter.
Compaq said its Compaq printer/PC bundles were doing well at retail (Compaq
sells Lexmark printers under the Compaq brand). Interestingly, our retail
contacts tell us that Compaq PC bundles with Lexmark branded printers actually
sell better than Compaq branded bundles.
If there's a weak spot it could be commercial PCs (24% of sales). We have
heard that Dell (DELL, $67, B-2-1-9) and Hewlett (HWP, $63, C-3-2-6)are very
strong in this market now. However, reports out of Taiwan indicate that
Compaq's corporate notebook business (10% of sales) is very strong. We have
heard anecdotes of spot notebook and server shortages, but the company says
there is no major backlog for any particular product.
Compaq's new Prosignia line for the small/medium business (SMB) market is
reported to be "doubling" Compaq's expectation, but the contribution will still
be insignificant to overall numbers. Hewlett Packard has gotten some press
recently about aggressively going after Compaq in this market segment. HP's
plan is to take advantage of unrest in the reseller channel caused by Compaq's
push towards direct sales, and gain market share through aggressive promotions.
Hewlett has historically been know as the most "channel friendly" PC vendor.
They are hoping to get into the many second tier reseller accounts that sell
Compaq products exclusively or primarily, and better penetrate the SMB market.
On the enterprise side (34% of sales), Compaq's storage business should see a
nice sequential increase. Compaq makes about a 50% margin on high-end storage,
but this will most likely decrease as Compaq attempts to be more competitive
with EMC. Tandem sales could come in better than expected. OpenVMS sales
should continue to decline as the installed base dwindles, but Compaq has had a
fair amount of success selling Digital Unix servers into these transitioning
accounts. The enterprise business is expected to grow to 60% of Compaq's total
business by 2000.
Service business (15% of sales) is still seeing positive growth. Maintenance
(about 50% of services) continues to grow in the single digits. The smaller
pieces of services, Network integration and outsourcing, are growing in the
double digits.
Operating expenses appear to be in check. Compaq will probably have laid-off
another 5,000 employees by quarter end, similar to the number laid off last
quarter. This would leave about 7,000 more employees to go from the original
plan of 17,000. Any upside to our EPS number would most likely come in lower
SG&A expense, which could result from Compaq quickly and cleanly continuing its
layoffs.
Compaq's stock is up 10% this week, on speculation that Compaq could spin off
Alta Vista, the Internet search engine it inherited with its Digital
acquisition. Alta Vista makes its money two ways- advertisement sales from
public Internet searches, and customized search engines for Internet sites,
such as Amazon.com. While the financial details of Alta Vista's business are
hard to come by, our Internet analysts Jonathon Cohen and Tonia Pankopf believe
that it could have a sales run rate of $150 million. Using a 7-8X price-to-
sales multiple would give Alta Vista a market capitalization of over $1
billion.
Table 1: Internet Search Engines/Portals
C1999E Sales ($M) Market Cap ($M) Market Cap/Sales
AOL $4,454 $40,058 9.0x
Yahoo 312 6,259 20.0x
Lycos 180 5,246 29.1x
Excite 235 2,646 11.3x
Infoseek 150 1,302 8.7x
Alta Vista 150 1,200 8.0x |
