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

To: Key West who wrote (56433)	4/9/1999 10:36:00 PM
From: Kenya AA	Respond to of 97611

Compaq Preannouncement Throws Analysts for a Loop By Eric Moskowitz and Marcy Burstiner Staff Reporters for theStreet.com 4/9/99 8:57 PM ET Late on Friday, the PC analysts were fuming. At the end of a quiet week, Compaq's (CPQ:NYSE) shocking earnings preannouncement caught most analysts wrong-footed, and forced them to rearrange their earnings models for the whole PC and hardware sector. There was a time when Compaq was a Wall Street darling. Oh, how time has changed. Compaq now says that it would report earnings of 15 cents a share, less than half of the 31 cents a share that analysts expected. Revenues will be around $9.4 billion. Compaq blamed weak demand and tough competitive pricing pressure for the fall in profits. One analyst, however, was gloating. "Did I tell you, or did I tell you?" Piper Jaffray analyst Ashok Kumar gleefully said shortly before he went on CNBC Friday evening to crow about his prescient Compaq earnings prediction. Just last month, Kumar said the Houston, Texas-based PC maker would earn 20 cents a share in its March quarter. Kumar, who maintains a buy rating on Compaq, had previously said Compaq would earn 35 cents a share, in line with consensus estimates at the time. Most PC analysts seemingly misjudged the buying patterns of corporations this year. In January, the consensus was that companies would keep buying PCs and computer supplies during the first half of 1999, and then orders would tail off as Y2K approached. But it seems as if corporations made their big PC orders in the second half of 1998. PC demand is down sharply this quarter, and some 20% below December 1998 quarter levels, according to recent projections from Credit Suisse First Boston. In terms of the PC industry, the news just isn't good -- no matter how you look at it, says Don Young, an analyst at Paine Webber. "I hate to see the industry I cover get trashed," he says. "But investor's attitudes had been that it's bad, but it's going to get better, and that's a Pollyannish view in my opinion." In February, Dell (DELL:Nasdaq) disappointed the market with its weaker-than-expected revenue growth. Now comes Compaq, the leading PC seller in the US, complaining of pricing pressures. "It's the profit margins that were hit hard," says Walter Winnitzki, an analyst at Hambrecht & Quist who had a buy rating on the stock. Winnitzki says that pricing pressures combined with lower-than-expected PC demand are hurting Compaq -- which sell more PCs than anyone -- extremely hard. Hambrecht & Quist and Piper Jaffray have done no Compaq underwriting. The rest of the industry will also be hit hard because this quarter in particular is so back-loaded, says Jeff Matthews, money manager at Ram Partners, who is bearish on the industry. "This has implications for Hewlett-Packard (HWP:NYSE) and IBM (IBM:NYSE) as well -- this isn't just an isolated problem because all these companies do not have a lot of visibility this quarter," he says. IBM and H-P are the third and fourth-largest sellers of PCs worldwide. Matthews has no position in PC stocks. Compaq's dire warnings will be a shock to the rest of the tech sector Monday morning, especially PC-centric semiconductor stocks such as AMD (AMD:NYSE) and Intel (INTC:Nasdaq), which will announce first-quarter earnings late Tuesday. As for the chip stocks, the relatively short bull run in the sector may be over. The dour Compaq news will certainly push lower the Philadelphia Semiconductor Index, which was ever so close to an all time high, said CIBC Oppenheimer chip analyst Ken Pearlman. "It can't be positive," he said. Pearlman said he's been concerned that companies are putting on hold the buying of new hardware or enterprise software while they conduct tests for Y2K bugs. "We are doing that here at CIBC, we'll have a lock down period and a lot of companies are doing it," he said. Pearlman believes Intel's outlook will not be good, given that Compaq has warned about decreased market demand. He expects Intel to report a soft mix of products sold and decreasing average sales prices. The recent bullishness in computer hardware and chip stocks comes despite rumors mid-March that Intel would preannounce (it did not) and two preannouncements by the other chip maker AMD. "The market just doesn't seem to respond to anything anymore," he said. "At best we will have a lot of volatility until the stocks can absorb some of the price gains." In the meantime, Intel's earnings Tuesday suddenly have become the key numbers for the whole health of the industry.

To: Key West who wrote (56433)	4/9/1999 10:38:00 PM
From: Kenya AA	Respond to of 97611

Compaq Who? Earnings Season Looks Chock-Full of Goodness By Justin Lahart Senior Writer for the Street.com 4/9/99 7:08 PM ET Earnings season can be so refreshing. Companies that do better than people think see their stock go up. Companies that do worse go down. Fast growers get rich valuations, slow growers don't and negative growers talk about how the weather or currency problems or the bad kohlrabi crop in Big Rapids hurt business. As luck would have it, it looks like the earnings season that is going to kick off in the coming week will be a good one. If they meet First Call consensus estimates, S&P 500 companies' earnings should grow by about 6%. Since analysts' forecasts generally tend to the conservative as earnings near, and since companies generally guide the analysts a little lower than what they think they'll make (helping to generate the beloved upside surprise), earnings should grow a little better than that -- about 8% or 9%, guesses First Call director of research Chuck Hill. (TSC runs a calendar of earnings expectations for S&P companies thoughout earnings season.) There are other positive signs as well. In the confession period that precedes earnings season, not nearly as many S&P 500 companies warned they wouldn't hit their number as in recent quarters. The pace of downward revisions by analysts ahead of earnings has also been slower. But for all these expectations of strength, it will be hard to convince Wall Street that it's about to see a good reporting period when it clambers into the office Monday. Compaq (CPQ:NYSE) has seen to that. The largest personal-computer maker warned Friday that it expects to earn just 15 cents per share in the first quarter -- 16 cents below the First Call consensus estimate. Come Monday morning, there will be plenty of sympathy pains in the tech sector. Compaq says it faced pricing pressure and increased competition; what about other PC makers? What's that do to Intel (INTC:Nasdaq)? How about the drive makers? Techs are going to get beat with an ugly stick. Eventually, the market will get over it. Other companies in the sector will come out and say that business is fine or that business is not fine. Investors will look at a chart of Compaq, see that its stock is at the same place that it was in August 1997 and wonder whether Compaq's problem isn't pricing or competition or that kohlrabi crop, but Compaq itself. -------------------------------------------------------------------------------- Despite Compaq's shortfall, the fact remains that quarterly earnings look pretty good. -------------------------------------------------------------------------------- And the fact remains that earnings look pretty good. Marshall Acuff, portfolio strategist at Salomon Smith Barney, thinks that that should help keep the running higher. Given the strength of the economy, he particularly looks for strength in sectors with strong ties to domestic demand. "Retailers, homebuilders -- those kinds of companies should do well because that's where the strength in the economy is coming from," he said. But there is potential trouble here. The economy is strong and that is driving earnings higher. Lovely. But then there is that thing besides earnings that drives stock prices: interest rates. And therein lies the problem. "The key question that is lurking out there is, can you get a sustained reacceleration of the profit cycle without reinflation?" said Rich Bernstein, chief quantitative strategist at Merrill Lynch. "I think that's the 10-cent question and personally, I don't think you can." "Everybody wants to be a new-paradigmer now," continued Bernstein, who counts himself among those who first embraced the idea that there had been a big shift in the economic environment. "However, our whole theory of the new paradigm was that over time in a disinflationary environment profits would evaporate. The problem is everyone wants to be new paradigm, but everybody also wants to have earnings reaccelerate. That's not new paradigm. That's paradise." Bernstein suspects that the disinflationary trend will continue and that the bump in first-quarter earnings is going to be the exception rather than the rule going forward. To him, that suggests that the narrow market is going to get narrower -- it's an economic environment wherein only the companies that are really executing are going to be able to continue to show good earnings. And he thinks the alternative -- good growth and better earnings -- is no better. Then the Fed takes away the punch bowl and the end comes to the cycle. Steve Roach, Morgan Stanley Dean Witter's chief economist, suspects that the economy will start to heat up a bit. "This is the fourth year in a row where the economy is growing much faster than expected," he said. "The question for us and the Fed and the bond market is, 'Can you keep growing at 4% to 5% without having any consequences toward inflation?' My guess is the old script has not been torn up. I think that the Fed will have to tighten before the party's over, but that tightening continues to look increasingly distant." But Roach is unconvinced that this will damage the stock market badly. While he believes that "the days of drawing sustenance from the bond market are over for stock investors," he also notes that stocks have held up well so far this year despite a backup in bond yields. "That's one of the most impressive things about this stock market," said Roach.