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2HRS2GO: Analysts seek answers from Compaq

    When Compaq Computer (NYSE: CPQ) tomorrow reports fourth quarter and year-end results, basic top and bottom line numbers probably won't relieve the company's legion of doubters.

    But bold plans might.

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    Since reporting better-than-expected third quarter results three months ago, Compaq has seen its stock climb 66 percent after hitting a 2-year low. The stock rose more than 5 percent this morning to nearly 33, as Donaldson, Lufkin Jenrette upgraded CPQ to a "buy" and Robertson Stephens reiterated a "buy" rating ahead of the quarterly report.

    Yet more than a third of Wall Street analysts polled by Zack's Investment Research maintain the equivalent of "hold" ratings on CPQ. One firm has a "moderate sell" advisory on the stock.

    Even analysts who recommend buying the stock believe the company has nagging questions to answer. "We're going to have to sort through some things," says James Meyer of Janney Montgomery Scott, which has a "buy" rating on CPQ.

    First Call consensus predicts a fourth quarter profit of 16 cents per share for Compaq. Zack's calls for 15 cents. Analyst estimates range from a low of 8 cents per share to a high of 21 cents, according to Zacks.

    (Ironically, the lowball forecast comes from a firm with a "moderate buy" rating, while the top end was issued by an analyst with a "hold". Talk about different standards.)

    Sales and earnings always carry great import, but keep in mind that Compaq is coming off a historically strong holiday season, so a certain amount of profit growth would be nothing extraordinary. The real focus and attention will be placed on the company's ability to solve some lingering questions.

    "There's a whole laundry list of things they need to do," says the oft-quoted Louis Mazzuchelli, analyst with Gerard Klauer Mattison.

    Look at Compaq's seemingly endless efforts to fully integrate the services and support arm that came with the Digital acquisition. Little has been heard on that front since Capellas became CEO six months ago, notes Janney Montgomery Scott's Meyer.

    And consider the company's overlapping distribution. Compaq sells through traditional retail and direct sales over the Internet. CEO Michael Capellas expects 40 percent of his company's PC shipments to come from direct sales. Compaq earlier this month paid $370 million for assets of distributor Inacom to speed those Web plans, but many observers don't believe that's enough.

    "I think the Inacom move they made was reasonably intelligent, but need to do more than that," Mazzuchelli says.

    Mazzuchelli wants to see Compaq accelerate its move to direct sales. Meyer believes Compaq should be willing to lose sales in certain areas to establish a long-term distribution infrastructure.

    Meyer also wants more information about Compaq's overall plans for the Internet. The company has a large portfolio that includes a sizable CMGI (Nasdaq: CMGI) stake acquired with last year's sale of AltaVista. Is Compaq planning to develop sales and distribution operations that truly revolve around the Internet, or is the company planning to play it through its investments?

    The Janney Montgomery analyst hopes Compaq doesn't plan on becoming some kind of CMGI-style investment firm mixed with real business operations. "I don't know that Wall Street buys into hybrid stories," Meyer says.

    At the same time, Compaq still needs to define itself as something more than a PC manufacturer. "They need to define their message so they can say, 'No, we're not just a box maker,' " Meyer says.

    Obviously Compaq is more than that, and has been more than that since buying Digital and Tandem. But Wall Street still thinks of Compaq merely as a PC maker, in the same way IBM (NYSE: IBM) was seen purely as a hardware company until Lou Gerstner brought Big Blue's services business into the forefront.

    Tomorrow's earnings call might not feature all the answers, because Compaq has an analyst meeting scheduled for two days later, in Houston. Regardless of which venue Capellas chooses to make a strong statement, he has to make one this week, Meyer says.

    "I've had a buy rating on Compaq since it was in the 20s, but to justify a move beyond the 30s and a price target in the 40s or 50s, we need a new paradigm," Meyer says. "The jury's still out. In the next week or so, we will all refine our conclusions."

    Other issues:

  • SAP
  • (NYSE: SAP) American depositary receipts gained ground today for the world's largest vendor of enterprise resource management software, following an upbeat fourth quarter report.

    The company saw license growth rise 45 percent year-over-year. "All the comments from management indicate the momentum is still there," says Stephen Palfrey, analyst with Sanford Bernstein. "We expect them to continue very strong license growth."

    Part of SAP's success comes from the overall ERP market rebounding in the post-Y2K era after a horrendous 1999. However, Palfrey also sees SAP gaining market share. "They have a great opportunity to sell new applications to their existing installed base," he says. "It's a market of increasing returns."

    SAP has the most leverage to for that sort of thing, because it already has the largest group of customers. Oracle (Nasdaq: ORCL) and SAP are seen as the ERP vendors most likely to be able to support their software and develop new apps, Palfrey says. "SAP and Oracle win hands down over the competition," he says.

  • CompUSA
  • (NYSE: CPU) I was surprised when I first heard a Mexican company would buy this sagging retail chain, but it didn't sound so weird once I found out it was Grupo Sanborns.

    The massive conglomerate needs to expand overseas, since there's only so much growth available in Mexico, and CompUSA is a relatively cheap way to get a foothold in the mightiest consumer market of them all. I don't know if Grupo Sanborns can turn around the chain, but an acquisition by another retailing group makes more sense than some of the rumors being tossed around last week that had box makers buying CompUSA. 22GO