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To: Mohan Marette who wrote (116894)	4/13/1999 1:00:00 AM
From: stockman_scott	Respond to of 176387

From Forbes...FYI... April 12, 1999 Lessons from Compaq: Hybrid model doesn't work By Om Malik Apr 12, 1999 NEW YORK. 01:15PM ES —It seems that Compaq Computer (nyse: CPQ) is a victim of its own Texas-sized ambition. It wanted to be everything to everybody. Sell high-end servers, sell goods over the Internet, sell cheap personal computers and also function as a search engine. This comes as no surprise given that its president and chief executive, Eckhard Pfeiffer, wants to become the top dog in the computer hardware business. In its effort to rule the already shrinking PC universe, Compaq decided not only that it would sell its PCs through retail channels such as the Radio Shack chain, but that it would also sell its boxes over the Internet via Compaq.com. It wanted to be a Compaq and a Dell at the same time. Well this past Friday it became painfully clear that this so-called hybrid model does not work. Compaq earnings for the first quarter are now expected to come in at 15 cents per share, about half of Wall Street's consensus estimate. It is also now obvious that Compaq was and still is basically a PC maker. "The quarter's shortfall reflects lower-than-anticipated market demand and increased competitive pricing in the commercial PC sector," Compaq's chief financial officer, Earl Mason, said in a short statement. The company blames International Business Machines (nyse: IBM) for being more aggressive in cutting prices in the corporate space. Not true. The PC market has been slammed by falling prices and slowing demand, and Compaq-- being the largest PC maker in the world with 15% of the market, according to International Data Corp.-- is suffering the most. However, it is becoming painfully clear that the hybrid model of retail and direct sales is the sole reason Compaq finds itself in trouble. Merrill Lynch analyst Steve Milunovich thinks that from a cost structure standpoint Compaq is simply not as well positioned as Dell to handle unexpected pricing pressure. In addition it does not have the channel management skills of Dell to produce computers on order. "We think Compaq is still figuring out how to adapt Dell's more efficient model and bring down costs," he says. "In other words, Compaq may have to make some 'bigger-picture' decisions, and this may not be the only quarter of problems." The feedback from the Compaq reseller network is that the company was offering greater rebates than usual to the resellers in order to appease them. Resellers feared that the direct Internet sales model would eat into their sales and as a result demanded their pound of flesh. These rebates have cost the company dearly--as reflected by the shortfall in its earnings. The slower PC sales and the price wars with other computer makers such as IBM and Dell have resulted in further erosion of profits. The hardware gross margins are down from 26.4% in the fourth quarter 1998 to 22%, according to Merrill Lynch estimates. It is clear that if Compaq is to survive the current downturn, the company has to shift its focus to higher end products and services, says Dan Niles, hardware analyst with BancBoston Robertson Stephens. He sees the company following IBM's model of services and Internet-related revenues to come out of this downward spiral. In light of these arguments, Compaq's $15 billion two-year shopping spree makes sense. Over the past 24 months the Houston-based PC maker snapped up high-end equipment makers Digital Equipment and Tandem and bought e-tailer Shopping.com to add a little e-commerce flavor to its revenue stream. But that transition will be some time coming. Wall Street knows that and is punishing Compaq for its poor performance. Shares of Compaq skidded 23% and are trading at around $24.38 Monday morning, off $6.68 from Friday's close but up from the session low of $23.13. More than 42 million shares have changed hands, and most of the top Wall Street firms have downgraded their ratings on the stock--Goldman Sachs, Morgan Stanley and BancBoston Robertson Stephens among them.>>

To: Mohan Marette who wrote (116894)	4/13/1999 1:24:00 AM
From: SirVinny	Read Replies (1) \| Respond to of 176387

Hi Mohan ... Hello Thread Can anyone explain to me in brief why analyst ratings for CPQ, whose earnings will be less than half of what was anticipated, dropped from a Strong Buy to Buy. While DELL, whose shortfall which was minimal last qtr was hammered. I know it has a high P/E but this isn't the only measure one should look at. What am I missing here??? SirVinny

To: Mohan Marette who wrote (116894)	4/13/1999 3:29:00 AM
From: PAL	Read Replies (3) \| Respond to of 176387

Mohan-san: Have you seen this? From Individual Investors: Compaq: 'The Mother of All Disasters' Analyst: Chris Bulkey (4/12/99) Shares of Compaq Computer (NYSE: CPQ) plunged by as much as 26% today, after the world's largest personal computer maker warned, after the closing of trading on Friday, that first quarter results would be below analyst's expectations. The market braced for today's sell-off and sure enough got it. The stock was recently trading at $24, down $6.94, or 22.4%, on the day. Like this Article? With blood in the streets, the temptation for some is to bottom-fish. We'll answer whether you should and we'll look at how other PC makers are looking in light of Compaq's punishing day. 'Mother of all Disasters' Analyst feedback regarding the health (or lack thereof) of the PC industry is widely varied to say the least. One thing that analysts are not refuting, however, is that Compaq's first quarter will be terrible. US Bancorp Piper Jaffray analyst Ashok Kumar called Compaq's expected first quarter numbers the 'mother of all disasters.' A number of brokerages, including Goldman Sachs, BancBoston Robertson Stephens and Morgan Stanley all lowered their ratings on Compaq. And analysts scrambled to lower estimates for Compaq's earnings outlook. One area, however, where analysts are not coming to a consensus involves whether or not Compaq's problems are company specific or mark the beginning of an industry-wide price war. Compaq announced on Friday that revenue will come in at $9.4 billion, while earnings will be $0.15 per share. Sales are roughly in line with analysts' forecasts, but earnings are going to fall 51.6% below the consensus of $0.31 per share. Here is where the dissenting opinions begin. The company attributed the shortfall to weakness among corporate PC sales where weak demand lead to an unfavorable product mix, which pressured margins. Hambrecht & Quist, Prudential, Warburg Dillon Read, US Bancorp Piper Jaffray and BT Alex Brown all echoed similar sentiments saying that Compaq's problems are company specific and not indicative of the overall state of the industry. They think demand in the corporate side of the market is somewhat soft, but was exacerbated with Compaq due to large end of the quarter sales that were missed. Prudential analyst Kimberly Alexy notes that concerns that overall PC sales are slowing have been mitigated with indications that order rates have accelerated in March. All indications are that Compaq's overall mix was unfavorable with price concessions in the corporate sector, which ate into profits. H&Q and Warburg Dillon Read also speculate that Compaq's server business is soft, which highlights ongoing integration problems with the Digital acquisition. Imminent Price War? Differing opinions are offered by analysts at Paine Webber and Salomon Smith Barney who feel that the magnitude of the shortfall is an indication that an industry wide price war is about to begin. They think sub-$1,000 computers and the commodity-like nature of the PC will continue to lead to lower prices. The lower pricing outlook combined with an inability to differentiate will cause manufacturers to compete on price. It is therefore believed that a fight for market share is already underway, at least in the corporate segment. All is Well over at Dell Evidence that the problems are specific to Compaq was provided by Dell Computer (NASDAQ: DELL), when the company met with analysts last Thursday (click on Dell's ticker to read our April 9th update). Dell offered a bullish outlook that lead BT Alex Brown Analyst Michael Carboy to say the company should continue to outgrow the market by a factor of 2-3 times. Dell's direct sales model and expanding PC server and services businesses should help to insulate the company from some of the problems that currently plague Compaq. Dell's efficiency in managing working capital should put it in a position to withstand pending price wars. At this time it is very difficult to get a sense of how the remaining PC makers fared this quarter. Compaq gave analysts virtually no advance warning of its difficulties, which calls into question its credibility with analysts -- another Compaq specific issue. Technology stocks, in general, are toppy after the most recent run-up, which will magnify any earnings warnings into significant downside in share price. Just look at today's sell-off in Compaq's stock for proof of what an earnings disappointment can trigger with markets at all-time highs. Upcoming earnings announcements from the other 'box-makers' are going to be critical to determine exactly where the PC market is headed. Feedback from analysts indicates that Dell is in the best position to deliver a strong quarter. Gateway, Micron Electronics, IBM, Hewlett-Packard Gateway (NYSE: GTW) should benefit from a large exposure to the consumer segment, but may not be able to withstand price wars due to its high expense structure. Micron Electronics (NASDAQ: MUEI) also has a large consumer presence, but would be prone to pricing pressure should it emerge in their business segments. IBM (NYSE: IBM) and Hewlett Packard (NYSE: HP) have very diversified businesses with PCs accounting for a minor percentage of revenue making their results an inappropriate benchmark. At this point there is no consensus as to what lies ahead for PC stocks. The slew of upcoming earnings announcements will determine exactly, which side of the argument detailed above will prove to be correct. My advice at this point is to underweight the PC hardware sector, as there is simply too much uncertainty as to how Compaq's problems will affect other manufacturers. After the smoke clears we expect that Dell will emerge as the best positioned to generate consistent profitability, and we continue to view the company as the best investment in the sector. Dell has proven time and again that they simply manage their business better than anyone else, and their booming e-commerce sales should provide upside. Bottom Line: The market is behaving as though the problems will ultimately prove to be related to Compaq specific issues, as the Nasdaq has rallied from a near 70 point decline earlier this morning to be up by 7+ points at midday. , We don't recommend bottom-fishing on Compaq. Paul