COMMENTARY -- The market's view on Compaq Computer (NYSE: CPQ) can be summed up in one sentence from an analyst report today. The caps are the analyst's.
"CPQ is clearly being cautious about worldwide economic fundamentals, NOT suffering from internal execution or strategic issues."
Wit Soundview's Mark Specker wrote that in his note issued this morning, following Compaq's fourth quarter report. Like Specker, Compaq investors nodded in approval: shares of Compaq shot up more than 11 percent today.
Specker was one of several analysts to go with a positive view of the world's largest PC maker, although it wasn't PCs that pleased analysts.
"We are putting money into Compaq at this time due to the diversification away from the PC, along with a diverse customer and geographic revenue base," A.G. Edwards analyst Peter Andrew notes.
Compaq seems to be putting most of its energy into the asset that came with the Digital acquisition in 1999. It's about time.
The company for years had an unhealthy obsession with the top spot in the PC industry. This time, Compaq reduced PC production in December rather than get into a ruinous price war with Dell Computer (Nasdaq: DELL) and Gateway (NYSE: GTW).
Rivals gained market share in PCs -- Dell on Monday boasted of huge gains -- but Compaq preserved its profit margins. Compaq CEO Michael Capellas realizes that PCs are a no-win situation at this point. He would rather make money instead of preserving some ephemeral title of PC King.
Especially now that PCs are a maturing market, where lowest cost wins. Viewed purely from a PC perspective, Dell is the best because it the most streamlined distribution model in the industry. Compaq would have to destroy its entire dealer network to emulate Dell's level of efficiency, and even then, there are no guarantees Compaq would be able to catch up.
Shareholders of Compaq should be thankful their company woke up before it let rivals erase its position in Big Money markets: servers, storage networks and IT services. "Industry Standard servers (+24%), Proprietary Servers (+17%) and Storage (+17%) were the key drivers to top line and bottom line performance," notes UBS Warburg analyst Don Young.
And in those markets, Dell's direct sales approach becomes less advantageous. Corporate hardware purchases are never made purely on the basis of cost; companies want the kind of services and support that Compaq offers with those Digital-born assets.
Dell can offer those things as well, through partnerships or other deals, but neither Dell nor anyone else offers a clear-cut difference that makes stands out immediately. Everyone competes with similar-sounding packages.
So let Dell have its PC cake. Compaq can make its money at a higher level of the IT food chain. 22GO
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