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

To: Chuzzlewit who wrote (59829)	4/25/1999 8:21:00 AM
From: rupert1	Read Replies (2) \| Respond to of 97611

I am frankly dumbfounded by your answer. Well that's a good start. Now do some lateral thinking. When I decided to invest in a boxmaker ..... Therein, lies the clue to your errors. You wanted a boxmaker and you got one in DELL. You also invested in it after it recovered from a very bad period in which it's survival was in question. I assume that you made decision after COMPAQ had had its own DELL like meteoric rise in growth and profitability. But more important you were comparing oranges and lemons. Dell prides itself on being a boxmaker and its business model is designed and fine tuned for that. COMPAQ's business model is appropriate for a broad IT company and its ambition is to move away from being mainly a boxmaker. In the last year it has increased its revenues from $5.6 to $9.4 billion in that effort. It's PC division is designed to become a lesser part of the whole, even while it will maintian its No.1 position and its leadership over DELL. >The purpose of SEC accounting is to let shareholders know company financial performance. Accounting needs to reflect that performance, or it is useless. I could quibble with the accuracy of this premise, but it is your conclusion which is most at fault. COMPAQ's accounting does satisfy SEC regulations and does properly inform investors. Given the nature of the business, certain factors in the PC division especially, but not so much in its other divisions, are difficult to account for in a simple and clear way, but that does not mean that they are not accounted for properly Accounting is not the only way a company is obliged to, or can volunteer to report and explain its performance to investors. Your reliance on accounting, and on your own partial definition of it, has blinkered you. why was profitability so low? Why do you assume that inventory overhang in the PC division explains low profitability across all divisions? You assume it because you are fixated on it - you are fixated on it, because you are captured by the DELL model. Inventory was historically low, or close to it. It was within the industry conventions appropriate to a distributor model of which I wrote in my first post to you. Despite your assertion, this does not explain low profitability. Indeed, a case might be made, when we get all the facts, that COMPAQ could have boosted paper profits by stuffing channels more than it did, and still remain within the conventions of the industry. WE do not have a detailed explanation from the company because Rosen wishes to review the information first. But there are some clues to why profitability was lower than expectations. The first is that the expectations were skewed. They assumed more channel stuffing, lower tax rates, use of tax credits, made no allowance for substantial one time losses due to the Brazil devaluation issue, assumed lower costs arising from restructuring, and assumed quicker results from the DEC and Tandem acquisitions through higher sales and higher margins in high-end servers. Leaving aside expectations and looking at the underlying issue of profits, there are a host of potential explanations of low profitability which have nothing to with inventory overhang. For example, overstaffing, loss of DEC clients, high R&D, temporary underperformance of assets due to restructuring, market conditions, roll out of new products whose sales have not yet geared up. I will concede that in the PC's division, which contributes a decreasing percentage of COMPAQ's revenues and profits, according to plan, there are costs associated with the mutli-channel approach which the DELL model does not have. This does not mean the DELL model is superior. It has served DELL well but will not survive if DELL diversifies like COMPAQ. But the mutli-channel model is better for COMPAQ's broader strategy. Within that there may be efficiencies to be made through the gradual adoption of more direct selling. if CPQ's problems were as simple to solve as some people on this thread believe, I'd be in this stock in a heartbeat. I don't know anybody on this thread who thinks that CPQ's "problems" are simple to solve. Some of the "problems" you are most agitated about are not problems at all except in your own mind. The real problems arise from the complex circumstances of a powerful company, growing by acquisition, and operating at the forefront of a rapidly changing IT industry.