| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| COVER STORY
For Compaq, Nowhere Left to Go but Up? Slow to the Net, no CEO, and another negative earning surprise: Could be time to buy It's not often that a company shocks Wall Street with a warning of dramatic quarterly losses and its stock price barely budges. That's what happened to Compaq Computer Corp. (CPQ) when it announced on June 17 that it may lose as much as 15 cents per share in its second quarter. Despite the company's lack of a CEO and its well-known struggle to meet the challenges to its business model posed by the Internet, analysts surveyed by First Call were expecting Compaq to earn 20 cents a share for the quarter ended in June. Yet even with the company's June 17 surprise, the stock actually rose a quarter point that day to close at 22 1/2. ''I would have thought that the stock would have at least fallen to $18,'' says Tom Dehudy, an analyst with investment management firm Lord, Abbett & Co. ''There must be value investors out there buying the stock today.'' Ashok Kumar, an analyst with Piper Jaffray who may have been the only Compaq observer on Wall Street to foresee a potential operating loss for the quarter, said in a June 8 research note that the stock could fall into the high teens on more bad news. That it didn't indicates to him that the only investors left are large institutions with big positions. ''It doesn't make sense for them to exit at these levels,'' he says. DOWNGRADED. For beleaguered Compaq investors, the good news is that the shares have likely bottomed out. Compaq is now 54% below its 52-week high of 49 1/4 on Jan. 27. Much of the slide came after the company warned in April that first-quarter earnings would be weaker than expected. On Apr. 12, the stock fell 22% and was downgraded by at least nine analysts. Chief Executive Officer Eckhard Pfeiffer was ousted shortly thereafter, and the company is still looking for a new CEO and chief financial officer. Still, the reasons for the anticipated second-quarter loss are the same as for the first-quarter shortfall. PC pricing pressures, slower-than-expected revenue growth and a ''noncompetitive cost structure'' were all reasons sited by Chairman and Acting CEO Benjamin Rosen. Compaq also announced on June 17 that it's restructuring in hopes of improving its competitive position and eliminating $2 billion in ongoing operating costs -- which likely enticed some investors to buy the stock. ''We are at the threshold of a new Compaq,'' Rosen says. He's realigning its business into three groups dealing with PCs (mostly for corporate users), consumers (including upcoming new handheld devices), and enterprise solutions (emphasizing setting up businesses for E-commerce). To cover the costs of restructuring, which will include layoffs, Compaq will take a ''substantial'' charge in the third quarter. ''I'm encouraged that the acting CEO is moving ahead quickly and decisively, not waiting for someone to drop out of the sky,'' says David Wu, an analyst with ABN AMRO. ''It's better to act -- to do something more or less right -- than to wait for the perfect candidate to come in and do the perfect thing way too late.'' FULL PLATE. But several buy-side analysts say the company still hasn't really confronted the major problems that brought about the downturn. They fault Compaq for not acting decisively when it became clear that the direct-distribution model for PC sales was more popular and more efficient than Compaq's retail dealer network. They also say the company had too much on its plate to confront the changes in the industry while trying to integrate its June, 1998, acquisition of Digital Equipment Corp. at the same time ''Companies like IBM and Dell, which didn't have to deal with a huge acquisition, saw what the Internet was and figured out how to exploit it,'' says Megan Graham-Hackett, an analyst with Standard & Poors equity research group. ''Now they are benefiting from first-mover advantage -- and Compaq is having to play catch-up.'' Compaq also didn't capitalize on its AltaVista search engine, which it gained through the DEC deal, although it plans to spin it off later this year. Compaq did eventually launch a hybrid direct/indirect distribution plan, but some analysts say it was muddled. ''They were so afraid of cannibalizing their own business that they didn't move quickly enough,'' says Michael Tucker, an analyst with Federated Investors. ''The competition is really going after them.'' Several analysts say they won't recommend the stock until they get more specifics on the restructuring. They want Compaq to come out with a full-fledged strategy for addressing the direct-distribution model for PCs, to explain why operating costs rose so dramatically in the second quarter (the anticipated loss is due more to higher costs than lower revenues), prove the Digital acquisition is working, and bring in a new CEO. ''I don't think you can do a full restructuring until you have new management,'' says Tucker. On top of that, Lord Abbett's Dehudy has concerns about the PC business in general because of lower average selling prices, thanks to the popularity of sub-$1,000 PCs. ''It's not just a Compaq issue, it's a PC issue, too,'' he says. With so many big questions for Compaq remaining, ''we'd rather wait for a little more visibility on those issues before getting back in,'' he says. ''DEAD MONEY''? On the flip side, other analysts see plenty of upside from here. ''The downside is limited,'' says Kumar, who has a buy rating on the stock. ''At worst, it's dead money. That's your risk. And then you have the upside potential.'' ''Compaq has leading market share in some very key computer markets,'' points out Graham-Hackett. It is now selling for only 13 times her 2000 earnings estimate, while the S&P 500 has a forward p-e of 24. ''Expectations are so low and the stock is so cheap, that you could have a new CEO walk in, do a little tweaking, and before you know it, the stock could double.'' It may take a few good quarters for Compaq to return to favor. New management, which Rosen promises in the ''not too distant future,'' will have to come in, and Compaq will have to prove its new strategy is working. A Compaq play may pay off for bottom-fishers. But even then, Wu's cautious strategy makes sense: ''I won't back up a truck,'' he says, ''but I'll probably nibble.'' By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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