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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (116735)	4/12/1999 4:19:00 PM
From: Chuzzlewit	Read Replies (3) \| Respond to of 176387

Here's one from Nationsbanc Montgomery: MONTGOMERY**NATIONSBANC MONTGOMERY COMPAQ COMPUTER CORP. RATING: BUY Price (4/9 close) $30 15/16 FY Ends 12/31 1998A 1999E 2000E 52-Week Range: $51 - 23 Fully Diluted Shares O/S: 1742 MM Q1 (Mar) $ 0.01 $ 0.17 Market Capitalization: $53.9 B Q2 (Jun) 0.02 0.31 Avg. Daily Vol. (3 mos.): 18 MM Q3 (Sep) 0.07 0.40 Secular EPS Growth: 20% Q4 (Dec) 0.43 0.57 FY1999E Revenues: $41.7 B Fiscal Year $ 0.53 $ 1.45 $ 2.00 Market Cap./Revenues: 129% P/E 58.2x 21.4x 15.5x 12/98 Long Term Debt: - P/E/G 291% 107% 77% 12/98 LTD/Total Cap.: 0.0% Previous Est. $ 1.87 $ 2.40 12/98 ROE: 8.2% 12/98 Shareholders' Equity: $11.4 B 12/98 Book Value/Share: $6.52 Dividend/Yield: $0.08/0.003% Friday P.M. Surprise -- CPQ Pre-Announces 1Q Shortfall; Execution Problems Lead to Gross Margin Hit o Friday after the close, Compaq pre-announced a minor revenue shortfall and major EPS shortfall, only half the expected EPS number. Management pointed to weaker-than-expected gross margins coming from price competition in corporate desktops and missed high-margin option sales late in the quarter. Enterprise systems and services were apparently OK. o As before, we believe Compaq's problems are rooted in mis-execution rather than a change in the industry demand environment. Compaq's disappointment in this year's 1Q extends a pattern evident in its 1Q's over the last several years. Dell* (DELL, $43, BUY), Gateway (GTW, $73, BUY), and Apex PC Solutions* (APEX, $15, BUY) would be the best buy on weakness opportunities. o We're reducing our estimates on CPQ to levels we think will allow for upside going forward. We'll be able to make more informed changes to our model after final results are announced on April 21. o We remain positive on the long-term story, but assume CPQ will be even more of a show me stock given its continued execution problems and growing credibility issues with investors. We continue to believe Compaq's expanding enterprise and services businesses can make it a long-term out-performer. 1Q to be well below expectations. 'Different year, same 1Q problems.' After the close Friday Compaq pre-announced preliminary 1Q sales of $9.4 billion and EPS of approximately $0.15. On Friday afternoon management attributed the shortfall mainly to increased price competition from IBM in corporate desktops and a stall in high-margin options sales at the end of the quarter because of a lack of certain high-end storage and memory products at supplier hubs. Management was unspecific about the details of the income statement and indicated that the quarter's numbers wouldn't be finalized until the end of next week. We believe reported EPS could actually come in a nickel or so higher than the $0.15 number approximated in Friday's press release. It appears the integration of DEC's accounting systems is not yet complete, delaying the closing of the books and reducing the detailed information currently available to management. The announcement was a surprise as it came several days after quarter-end with an EPS number well below the range of estimates. Otherwise, the market had been aware of a soft quarter since late February and spent most of March braced for a pre-announcement. Even with the accounting systems problems mentioned above, it's still not clear why Compaq wouldn't know until April 9 that it would deliver only half the expected March quarter EPS number. (For what it's worth, the company pre-announced its last two 1Q shortfalls in the first week of March. Both were before the DEC acquisition.) Management's stated concerns during the quarter, including at our investor visit to Houston on March 11, centered not on gross margins but on revenue softness and the effect of the devaluation of the Brazilian Real on the Other Income & Expense line. We see an optimistic but unconfirmable scenario that reported EPS will be a managed number meant to set the stage for a strong 2Q. The quarter's shortfall is primarily on the gross margin line; this helps explain why supplier and channel checks looked OK during the quarter. The revenue shortfall ($9.4 billion versus our $9.75 billion estimate) is within the range of analysts' expectations and would mean only a penny off EPS if the other assumptions in our model were met. Management confirmed that the shortfall was attributable primarily to gross margins and the Real devaluation. It appears our previous operating expense assumptions are roughly correct. Compaq's relatively in-line unit results but weak margins explain why we saw few signals of a significant EPS shortfall among Compaq's component suppliers and distributors/resellers in the course of the quarter. We're reducing estimates to levels we think allow for upside going forward. We'll be able to make more informed adjustments after the company reports on April 21. Management offered no guidance on future quarters on Friday. Our estimate reduction is based in roughly equal parts on lower revenue and lower gross margins. Note that our new FY00 revenue forecast of $46.1 billion is now 8% below management's stated goal of $50 billion and our new gross margin forecast is well below the 1997 pro forma (Compaq and DEC) level of 29.8%. We'll be able to model with more confidence once we know CPQ's actual gross margin for 1Q. It will likely be somewhere between 23.5% and 25.5% depending on CPQ's actual EPS number and how much of the quarter's EPS hit wound up not on the GM line but on the OI&E line from the Brazilian Real. EPS ESTIMATES 1Q99 2Q99 3Q99 4Q99 FY99 FY00 Current $0.17 $0.31 $0.40 $0.57 $1.45 $2.00 Previous $0.33 $0.41 $0.48 $0.66 $1.87 $2.40 1Q99 2Q99 3Q99 4Q99 FY99 FY00 Revenue ($B) Current $9.4 $9.8 $10.4 $12.1 $41.7 $46.1 Previous $9.8 $10.3 $11.0 $13.0 $43.9 $50.7 Gross Margin Current 24.7% 26.4% 27.3% 28.2% 27.0% 28.5% Previous 27.5% 28.4% 28.7% 29.2% 28.5% 29.5% We remain positive on the long-term story but assume CPQ will be even more of a 'show me' stock given its continued execution problems and investors' growing skepticism. We're as comfortable as before that Compaq's expanding enterprise and services businesses can make it a long-term out-performer. Our concern remains the ongoing execution problems in Compaq's commercial desktop PC business, which accounts for less than 30% of company revenue but can cause big hits to the bottom line during times of mis-execution. We continue to view Compaq's internal problems as fixable but share the market's growing frustration at the lack of progress to date. * NationsBanc Montgomery Securities LLC currently maintains a market DELL and APEX. NationsBanc Montgomery Securities LLC was manager or co-manager of a public offering and/or has performed investment banking or other services for APEX in the last three years. 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.