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Compaq shares sink following earnings report

Shares in Compaq Computer fall more than 8 percent following news that the PC maker's revenue growth could slow.

Shares in Compaq Computer fell today following news that the PC maker's revenue growth could slow.

Shares fell $2.50 or 8 percent to $28.50 in trading today, on heavy volume of 40.2 million. Compaq released its earnings report yesterday after the close of trading.

Today's dip follows a slow but steady rally in Compaq stock over the past few weeks leading up to the company's earnings announcement.

In a conference call yesterday following the earnings news, Compaq CEO Michael Capellas told financial analysts he anticipates 2000 revenues will grow by 15 percent over 1999, despite a sluggish start.

"The first quarter will start out a little bit slow," Capellas said according to Reuters, adding, "We expect revenue to decline quarter-to-quarter due to seasonality and…be backloaded due to the release of Windows 2000."

Additionally, concern over operating margins may be another factor giving investors pause, some financial analysts said.

"Earnings were in line, and there was nothing particularly negative," said Ashok Kumar, an analyst with US Bancorp Piper Jaffray. "The question is, can the company take back operating margins to (pre-Digital acquisition) levels of 8 percent. Right now, they are around the 4 percent level. So with gross margins continuing to have a negative bias, all that's included in the operating expense line."

Kumar said Compaq's enterprise computing and services group, which accounts for more than 50 percent of total revenue, is one area of concern. He added that Compaq is too focused on high-end Himalaya and Alpha servers, which are not growth areas, although Windows 2000 sales could help lower-end server sales later in the year.

"In the services segment, they're basically focused in all the wrong areas, mainly the Tandem and (Digital) platforms, which are not growth areas," Kumar said. The financial analyst warned the commercial computing group, which once again lost money, is another area driving costs up and margins down.

Merrill Lynch analyst Steve Fortuna remained cautious, but somewhat optimistic, about Compaq. In a report issued this morning, Fortuna maintained his "neutral" rating on Compaq shares.

"Though company management has explicitly guided to higher top- and bottom-line growth numbers, we feel more comfortable with our estimates, especially in light of the enormous amount of work still ahead," Fortuna wrote.

The Merrill Lynch analyst was pleased with Compaq's efforts reigning in operating costs, beating his estimates by $230 million.