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

To: rupert1 who wrote (55535)	4/4/1999 9:52:00 AM
From: Aitch	Respond to of 97611

Hi victor and hio, Thanks for the Easter wishes. Reciprocated of course. Attached an Easter Information Egg: COMPAQ COMPUTER: REDUCED EXPECTATIONS 04:33pm EST 1-Apr-99 Warburg Dillon Read (Charlie Wolf) HIGHLIGHTS: In response to weaker than expected sales in the first two months of 1999, and the prospect of modestly slower growth and lower margins through the remainder of the year, we are reducing our March 1999 EPS estimate for Compaq Computer from $0.39 to $0.33 and our full-year EPS estimate from $2.00 to $1.75. Compaq's major challenge in 1999 will be the integration of DEC. Building an organization of close to 100,000 employees and melding two dramatically different cultures could take the remainder of the year and may create the possibility of an earnings shortfall along the way. Compaq must also deal with the channel conflict issue. The company has made considerable progress toward build-to-order manufacturing and has reduced inventories in the process. However, it still fulfills most of its orders through the dealer channel, which adds up to six to seven points to its prices. CPQ appears cheap, but not cheap enough. In our view, Compaq's shares are cheap by any valuation standard and are unlikely to underperform the market unless disaster strikes. However, we currently detect no catalyst for the stock to outperform from current levels. Millenium woes. Then there's the Y2K problem hanging over the second half of 1999. Although the issue may end up being more bark than bite, at this stage we believe it carries the potential to derail what traditionally has been a stronger seasonal cycle in the second half of the year. A Rough Road Ahead Contrary to expectations early in the year, the March quarter has conformed to its more traditional pattern - a decline in revenues and earnings from the December quarter. Specifically, Compaq noted several weeks ago that it was experiencing weak sales in the small and medium sized business (SMB) market in the first half of the quarter. In a recent one-on-one meeting, Earl Mason, Compaq's chief financial officer, could not pinpoint the reason for the slowdown - in particular, he could not tell whether it was a Compaq-specific problem or indicative of overall industry trends. At the same time, Mr. Mason noted that sales in other segments and regions were at or above budgeted targets for the quarter. Our longer-term concern is the risk of a negative impact on sales and earnings arising from Compaq's integration of DEC, which Compaq acquired in June 1998. We think Compaq bought DEC for a song and that it has already plucked the low- hanging fruit from the combined operation. Thus, we believe additional expense reductions going forward will occur more slowly. Compaq's real challenge is to meld the very different cultures of the two organizations into an effective whole. This could take the remainder of the year, simply because of DEC's much larger head count relative to Compaq's. In addition, the consensus view - which we have no way of confirming or refuting - is that commercial PC desktop hardware sales may not exhibit their traditional seasonal buoyancy in the second half of the year because of the Y2K problem. Finally, revenues in the consumer segment of the market may not experience as large a seasonal pop in the December quarter as in recent years. It's our belief that the dramatic reduction in PC prices, targeted at the home market in the December quarter of 1998, generated considerable forward buying on the part of consumers. Without similar price reductions in December 1999 - an event to which we assign a virtually zero probability - consumer PC purchases could be on the light side relative to the traditional seasonal upswing. The killer app driver of consumer demand - broadband access to the Internet - is unlikely to substantively hit the airwaves before the December quarter of 2000, if then. Anticipated changes in two variables - revenues and gross margins - account for the $0.25 reduction in our 1999 EPS estimate. In our previous forecast, we had hardware unit shipments of 16.1 million in 1999. Our new forecast is for shipments of 16.0 million units. We also expect the average selling price for Compaq's products to be modestly lower than we had previously thought, although we still expect it to be up slightly from 1998 because of a shift in the mix of sales to higher priced servers. Together, these changes bring our 1999 revenue forecast to $41.3 billion versus $43.0 billion previously. The major contributor to the reduction in our 1999 estimates is our assumption that Compaq's gross margin will not increase as much as we had previously assumed. We now forecast a 1999 gross margin of 28.0% versus 29.0% previously. Both numbers, however, are considerably higher than the 25.6% gross margin reported in the December quarter of 1998. We have not materially changed our gross margin assumptions for commercial desktop and consumer PCs. However, we are more cautious regarding Compaq's ability to increase the gross margin on its portfolio of servers. At 17.7 times our revised 1999 EPS estimate, we believe Compaq shares are cheap by any measure. We maintain our Hold rating, however, because we do not see any catalyst in Compaq's fundamental story that could cause the stock to outperform from current levels. At the same time, risks arising from the challenging integration of DEC create the possibility of an earnings shortfall. Finally, the Y2K problem - although a one-time event rather than a trend - has the potential to slow sales during the normally robust second half of the year.