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

To: Night Writer who wrote (50235)	2/27/1999 3:48:00 AM
From: Aitch	Read Replies (1) \| Respond to of 97611

More... CPQ: Trimming 1Q On Management's More Cautious Outlook 02:23pm EST 26-Feb-99 Montgomery Securities FY Ends 12/31 1998A 1999E 2000E Q1 (Mar) $ 0.01 $ 0.33 MQ2 (Jun) 0.02 0.41 Q3 (Sep) 0.07 0.48 Q4 (Dec) 0.43 0.66 Fiscal Year $ 0.53 $ 1.87 $ 2.40 P/E 67.5x 19.1x 15.0x P/E/G 338% 95% 75% Prev. est. $1.90 Trimming 1Q On Management's More Cautious Outlook Compaq's CFO made cautionary comments about 1Q in response to questions during CS First Boston's tour yesterday. It appears certain segments of CPQ's business are tracking below plan so far this quarter, creating slight exposure on the top line. (We go into more detail below.) A currency hit from the Real devaluation in Brazil appears to be the larger issue for EPS. Management's 'revised' take on the quarter followed an operations review earlier this week, subsequent to our positive note last Friday. Management says a 1Q revenue shortfall isn't a forgone conclusion at this point but that a revenue outcome of $9.75 billion is more likely than our $9.95 billion estimate (i.e., 2% lower, which would take $0.01 out of EPS in our model). Management says the larger exposure to 1Q EPS is a one-time currency hit in Brazil, related to the devaluation of the Real, which will likely push down the Other Income & Expense line and take $0.02 out of EPS. We're waiting for more details on the currency issue as the suggested EPS hit sounds out of proportion given that Brazil is only about 1% of Compaq's sales and that hedging is available, albeit expensive in Brazil. Based on what we know now we're reducing 1Q revenues from $9.95 billion to $9.75 billion and reducing Other Income & Expense by $40 million. This reduces 1Q EPS from $0.36 to $0.33. Our FY 99 estimate goes from $1.90 to $1.87 due to the cut to 1Q. Estimates 1Q99 2Q99 3Q99 4Q99 FY99 FY00 Current $0.33 $0.41 $0.48 $0.66 $1.87 $2.40 Previous $0.36 $0.41 $0.48 $0.66 $1.90 $2.40 Today's news is obviously discouraging but doesn't significantly change our longer-term view of the story, as we've known the near- term vulnerability was the top line, with gross margins being the main source of upside through FY 99. (For what it's worth, the EPS effect of a 2% revenue shortfall in future quarters could be offset by about 50 bp of gross margin upside.) As far as the state of overall industry demand, we're concerned about the recent pattern of revenue shortfalls among the PC companies and several channel players, but continue to think the problem lies more with overly aggressive expectations and other company-specific issues than with a significant slowing in end user demand. Detail From Our Discussion with Management This Morning: o An operations review earlier this week showed weakness in medium business in Europe and North America in January and early February; order rates picked up in the last half of February and are now good. o The devaluation of the Brazilian Real will hurt Latin American profits (Latin America is about 4% of the top line), although Mexico is doing OK. Asia, about 11% of revenue, is doing very, very well. o Management said that, with the recent pick-up in demand, the risk to the quarter is shipping enough product by the end of March. o Services and high-end products (servers, workstations) are doing well; these carry gross margins well above average. o Management guided the top line down by at the most about $200mm; this would take $0.01 off EPS. o Management suggested the currency hit from the devaluation of the Brazilian Real, which will show up not in revenues but in Other Income and Expense, would take $0.02 off EPS. With 1998 revenues of $31 billion, Compaq is the worldwide market leader in PC's. Headquartered in Houston, TX, the company has manufacturing in the U.S., Scotland, China, and Brazil. Compaq's revenue split by geography for 1998 is estimated at 54% North America, 32% Europe, 6% Asia Pacific, 4% Latin America, and 4% Japan. Pro forma 1998 revenues for Compaq and Digital Equipment Corporation (acquired in June 1998) combined were $36.5 billion, making Compaq the world's second largest computer company.