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

To: Aitch who wrote (50234)	2/27/1999 3:59:00 AM
From: Aitch	Respond to of 97611

Again with more... COMPAQ: Downgrade to Neutral from Buy 10:02am EST 26-Feb-99 PaineWebber (Young, Don) CPQ: THE CYCLICAL RECOVERY DRAWS TO A CLOSE KEY POINTS * The cyclical recovery story in PC's appears to be over. Dealer channel inventory is flat, while distributor channel inventory is rising. End user demand is softening with demand in the medium and small business markets weakest in both the US and Europe. In Europe, UK demand appears to be the weakest. * January and February was soft for the industry, with end user demand likely running at about 1/2 our 17% unit growth forecast. We're not sure why, but possible reasons include the transition to Pentium III, Merced/NT5.0 delays, post-Euro slowdown, IT budgets shifting more in favor of Y2K fixes, and/or modest economic slowing particularly in Europe. * Our Compaq recommendation had been based on a cyclical and secular recovery. The cyclical recovery is over and ended sooner than we expected due to end user demand. However, the secular story remains very much in place and Compaq longer term remains best positioned to be the winner with a multichannel distribution model. Compaq is the best positioned for the longer term but the soft spot in demand is concerning. * We believe weakness in competitors IBM, Dell, HWP, GTW and MUEI also extended to Compaq in the first quarter. We believe Compaq demand in 1Q is on the light side so far and additional expense control measures have been put in place by Compaq management. Weak end user demand leads us to reduce our rating on Compaq to Neutral (and off the ABC list) and lower our estimates modestly from $1.95 to $1.85. We've always believed in the commodity nature of PC's and channel inventories are the trigger. * And we would note that Compaq's first quarter could be at risk by $0.03/share for the devaluation of Brazilian real. * We are also concerned about ratings on the following stocks: HWP -- due to the exposure from both PC 's & printers; Dell -- the stock has pulled back in recent weeks but valuation remains high and presents concerns in a slower PC growth environment. We are less concerned about MSFT -- our forecast remains below even these lower PC shipment levels, and we remain very comfortable in MSFT's ability to make estimates. The Office 2000 and Windows 2000 upgrade cycles are attractive for MSFT as well. We have not seen evidence this softness extends to server vendors, and we would note that the server market is less leveraged in the small/medium business market than the PC industry is. We are maintaining our server demand forecast. Per Share (fiscal year ends December) 1998A 1999E Prev 2000E Prev 1Q $0.01 $0.37 2Q 0.02 0.41 3Q 0.07 0.49 4Q 0.39 0.67 Year $0.48 $1.85 $2.55 FC Cons.: $0.47 $1.80 $2.28 Revs.(MM): $35,426 $43,000 P/E: 85.4x 22.2x 16.1x We've always believed in the commodity nature of PC's and channel inventories are the trigger. Since mid 1998, channel inventories have been falling, indicating that PC demand was in excess of PC supply. While this cyclical recovery has been favorable for the industry, it is now over. Dealer channel inventory is flat, while distributor channel inventory is rising. The final distributor reports were released in the last two days. End user demand is softening with demand in the medium and small business markets weakest in both the US and Europe. In Europe, UK demand appears to be the weakest. Our Compaq recommendation had been based on a cyclical and secular recovery. The cyclical recovery is over and ended sooner than we expected due to end user demand. However, the secular story remains very much in place and Compaq longer term remains best positioned to be the winner with a multichannel distribution model. Compaq is the best positioned for the longer term, though the soft spot in demand is concerning in the near term. We believe weakness in competitors IBM, Dell, HWP, GTW and MUEI also extended to Compaq in the first quarter, and that Compaq demand in 1Q is coming on the light side so far. This shifts the risk profile to the second half of the quarter. Weak end user demand leads us to reduce our rating on Compaq to Neutral (and off the ABC list) and lower our estimates modestly from $1.95 to $1.85. And we would note that Compaq's first quarter could be at risk by $0.03/share for the devaluation of Brazilian real. Inventory Days 1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 Dealers/Aggregators Compucom 58 43 53 42 47 48 36 40 57 36 25 23 Entex NA NA NA NA NA NA 32 28 30 34 27 24 Vanstar 76 64 75 64 76 77 66 79 71 46 39 39 Inacom 50 40 50 42 43 48 49 41 48 35 32 26 CDW 14 18 20 17 22 16 21 19 19 13 12 14 Total 55 45 54 44 49 52 48 48 52 35 28 26 Dealers/Aggregators Distributors Merisel 28 27 19 33 31 38 38 42 41 38 39 47 TechData 43 41 51 57 48 44 49 47 43 36 32 (36) Southern 46 51 42 56 55 65 62 64 48 60 29 57 Electronics Ingram Micro 52 47 46 50 57 48 54 48 43 39 39 48 MicroAg 32 33 30 53 43 37 35 50 38 29 30 34 e CHSE(/AQS) 37 40 57 39 39 32 47 37 35 41 38 35 Total Distributors 41 39 40 48 48 43 48 46 41 38 36 43 TOTAL INVENTORY 44 41 40 44 46 45 47 45 43 37 34 40 DAYS