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

To: rupert1 who wrote (60290)	5/2/1999 5:43:00 AM
From: rupert1	Read Replies (3) \| Respond to of 97611

Elwood: As you know, in response to your and my question, Loki kindly sent out a number of Private Messages yesterday, to explain his comments on the "missing 16 cents" and SG&A. It might interest other readers. I would be interested in further comment. The following is my paraphrasing and elaboration of Loki's analysis. Definition of Terms: R Revenues GP Gross Profit NP Net Profit SGA Sales, General and Administrative expenses COS Cost of Sales Assumptions: Total Revenues less COS = GP GP less SGA (and R&D/taxes) = NP SGA as a percentage of Revenues historically averages 12% Source: compaq.com Analysis: Q1 1998 R = $5,687 millions Q2 1999 R = $9,419 millions Q1 1998 SGA = $785 millions or 13.8% Q1 1999 SGA = $1,477 millions or 15.7% Note: SGA in Q1 1998 was 1.8% higher than the historical average of 12% because of inventory overhang and other special considerations. SGA in Q1 1999 was 3.7% higher than the historical average of 12%. 3.7% of $9,419 millions = $348.5 millions. Divide that by 1,750 million outstanding shares, and the total is 0.199 cents per share. Conclusions: 1. The 3.7% rise in SGA expenses over the historical average cost 0.199 EPS. 2. Had this rise been recognised by COMPAQ management and conveyed in time to analysts, analysts would never have expected 29-35 cents a share (average 31/32) but would have expected 16 cents. It is the unanticipated gap between expectations and performance that has caused the market to punish the stock so severely. 3. Comparing Q1 with several previous years, it looks as though the rise in SGA was predominantly due to the acquired DEC business. DEC services, for example, produced a profit margin of 32% on $1.6 billion in revenues. But they also have very high SGA. Some of this high SGA arises from the nature of the services business, but that aside the DEC services business and some of its product groups, need serious pruning to bring COMPAQ's overall SGA expenses nearer to the historical norm of 12%. The indications are that reducing some excess management would be very effective. 4. If the 3.7% rise in SGA is essentially a transitory lump - as the snake swallows its prey - the EPS of 16 cents is not as bad as it has been portrayed. 5. It has been suggested that the "missing 16 cents" is explained mainly by lower margins arising from lower prices for hardware. That is difficult to fix because COMPAQ cannot dictate the market. But Loki's analysis suggests that serious further cost-cutting to get back to COMPAQ's historical average of 12% SGA, could recover much of the "missing 16 cents". 6. Of course, it may be that COMPAQ's historical SGA norm will have rise somewhat to reflect that more than 50% of revenues come from non-PC's products and services. But any percentage increase in SGA from that source might be offset by cost-savings in channel efficiencies.