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

To: rupert1 who wrote (54273)	3/20/1999 2:54:00 PM
From: rupert1	Read Replies (1) \| Respond to of 97611

Sorry I timed out on previous post. Now back to Brazil. There have been two reports which mentioned Brazil. I still don't fully understand how this is going to be treated in the accounts. The figures given are estimates and both analysts question the large size. It is also unclear whether it is a loss through devaluation soley on the receivables, whether the receivables are those from 4Q or 1Q and whether the losses were stopped with hedging for the rest of February and March. It is not clear whether it will be treated as a charge, before the EPS, or whether it is considered an operational reduction in revenues for the quarter. It has further importance because almost all the analysts have taken the 2-4 cents Brazil estimate as though it arose from slowng sales in the main markets. It had nothing to do with sales. Here is the original Credit Suisse First Boston report on the Brazilian issue. "Management says a 1Q revenue shortfall isn't a forgone conclusion 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)." The author goes on to suggest that the heavy hit on the quarter is not the slowdown in sales but the Brazilian devaluation. "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.) 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." This should be juxtaposed with the more recent report from Bear Sterns. It looks like Bear Sterns has simply added the 1or2 cent(s) which arises from slow sales with the 2or3 cents which arises from the devaluaton issue: Why Real Devaluation Effect So Large? The company stated that although Latin America represents only 4% of sales, around half of which are in Brazil, the company was forced to write down $200 million in accounts receivable because of the devaluation which translated into $0.03-$0.04 one-time negative effect on 1Q99 EPS.