April 13, 1999
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Compaq's Stock Stumbles 22%
After Warning of Plunging Profits
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Shares of Compaq Computer Corp. tumbled 22% Monday, closing down $6.875 to $24.0625 near a 52-week low of $22.9375, after the company warned of slowing sales and plunging profits.
The Houston computer maker went to great pains to claim its problems weren't of its own making, scheduling two separate calls with investors and analysts Monday after saying there would be none. "It is, we believe, an industrywide problem of very competitive pricing," said Compaq Chief Executive Eckhard Pfeiffer. He also said corporate demand for personal computers improved somewhat in March but that the improvement wasn't enough to overcome the revenue shortfall.
Still, analysts lowered their projections for the first and second quarters, signaling they don't expect a quick fix to its profit woes. In addition to more than halving consensus estimates to 15 cents a share for the first quarter, analysts lopped a third off their projections for Compaq's second-quarter profit.
Technology Shares Fall
Compaq's bad news sent shares of other technology companies sliding, including International Business Machines Corp., Intel Corp., Dell Computer Corp. and Gateway Inc. Compaq's gloom contributed to an early decline in the Dow Jones Industrial Average, but the average recovered and ended the day up 165.67 to close at 10339.51.
The world's biggest PC maker is now expected to earn about $460 million, or 26 cents a share, in the second quarter, down from the $685 million, or 39 cents a share, originally expected, according to estimates tallied by First Call. The company said late Friday it expects to report a first-quarter profit of about $250 million, up from $16 million a year ago, on revenue of $9.4 billion. Results are expected April 21.
Analysts continued to see the company as mired by its own missteps. "We talked to Dell, IBM and H-P [Hewlett-Packard Co.] and they're all feeling pretty good about their PC businesses right now," said Merrill Lynch analyst Steven Milunovich. He believes Compaq is losing its most profitable PC sales to direct sellers such as Dell and is being forced to compete on price against lower-cost suppliers. "The rugs are being pulled out from underneath them. They are squeezed from above by direct [sales] and from underneath by $400 to $600 PCs," Mr. Milunovich said.
"If there's an industry problem, we would have heard from Intel by now," said David Wu, an analyst at ABN AMRO. "Compaq made up 13% of Intel's business last year. The fact that Intel hasn't preannounced a shortfall says 87% of the world is doing OK."
In an expansion of its previous statements, Compaq said Monday its profit also was hurt by shifts within its sales of high-performance systems and add-on products.
Mr. Pfeiffer, the CEO, blamed a "shortfall" in sales of high-profit computer options, such as add-on storage devices, and a tendency by its buyers to prefer lower-priced network servers, which also carry lower profits. He declined to provide specifics of the sales declines.
James D. Poyner, an analyst with CIBC Oppenheimer, said the shift to lower-priced PCs indicates that Compaq's business customers aren't embracing machines using the latest Intel chips, the Pentium III processors, which carry higher margins. The profit swoon "says the Pentium III product cycle is a dud," he said. "This is the industry's worst fear: The corporate market is discovering cheap PCs just as consumers did two years ago." Indeed, he believes computer buyers may be stealing a trick that auto buyers began using a few years ago -- holding out for discounts. "The one thing buyers can make book on is PCs are going to be cheaper in six months. We may be into this vicious cycle of rebates where buyers wait for the rebate," Mr. Poyner said.
Dell Takes Lead
In another indication of the company's woes, Compaq saw Dell surpass it last quarter as the leading PC supplier to U.S. businesses, according to market researcher ZD Market Intelligence. It said Dell took a 21.2% share of PCs sold to U.S. businesses, compared with 18% for Compaq. "Preliminary results from the first quarter of 1999 indicate that Dell is now opening up a sizable lead," the firm said. It based the results on a telephone survey of businesses.
Company Profile: Compaq Computer
Some institutional shareholders said they wouldn't be surprised by changes in Compaq's management as a result of the continued troubles. "There is a lot of anger out there. [It] isn't so much the problems in the company as it is the way the company mishandled what was going on," said Chris Grisanti, director of research at Compaq shareholder Spears Benzak Salomon & Farrell Inc.
"Someone should take responsibility for this," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray, who in a prescient move lowered his first-quarter revenue and earnings estimates three weeks ago to $9.4 billion and 20 cents a share, citing dealer attempts to move out older inventory. Part of the sell-off in Compaq shares can be attributed to investors concerned with the company's flip-flops. As recently as late February, it sought to allay Wall Street's profit fears. "The Street will be willing to forgive them even a disastrous quarter if there was the confidence it would be dealt with in an open, straightforward manner," said Mr. Grisanti.
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