Compaq plays down inventory worries

Compaq Computer (NYSE: CPQ) issued a statement defending itself against a downgrade Thursday.

Shares slumped 13 percent Thursday afternoon after Salomon Smith Barney lowered its investment rating on the stock, closing at 25 11/16. The stock was stuck at that price 15 minutes after Friday's opening bell.

The investment firm cut its rating on the stock to "neutral" from "buy," and lowered its price target to $25 from $45, citing second quarter revenue and channel inventory concerns.

"We have confirmed that Compaq has extended price protection terms on some corporate products from 20 days to 30 days," said analyst Richard Gardner in a statement. "We are not sure whether this is related to existing channel inventories, or inventory that could go into the channel between now and the end of the quarter, but it is not a positive signal."

Gardner said he believes Compaq's channel inventories are the highest among the major PC vendors, and that inventory buildup may have a negative near-term impact on PC margins. He also said his current earnings per share and revenue estimates were under review.

At 4:05 PM ET, Compaq issued a terse statement in response to the Solomon Smith Barney report, stating: "At this time, we are comfortable with channel inventory levels."

The company said "channel inventory has been low and in some cases near stock-out levels. Q2 has been very back-end loaded due to supply constraints early in the quarter."

The statement, signed by Jesse Greene, the company's Chief Financial officer, added that there have been no changes to standard price protection terms or any adjustments made in the normal course of business.

Compaq is expected to report a profit of 21 cents a share in its second quarter, according to First Call's consensus of 28 analysts.