COMMENTARY -- For the last year, Compaq Computer (NYSE: CPQ) has been the ultimate "show me" stock. CEO Michael Capellas won Compaq's credibility back, but the company was still mired in single-digit growth. Compaq finally silenced its remaining critics by posting revenue growth well ahead of expectations.
Let's put this growth in perspective. Compaq easily topped sales growth expectations. Analysts were hoping for double-digit growth and would have cheered growth in the midteens. Compaq posted year-over-year growth of 22 percent. Sure, it was an easy comparison, but Compaq has clearly graduated from "show me" status.
Compaq reported third quarter revenue of $11.2 billion, which was well ahead Wall Street's most optimistic projections. Earnings excluding charges were 30 cents a share, a penny ahead of estimates. Revenue targets ranged from $9.6 billion on the low end to $10.9 billion on the high end.
The only glitch with Compaq was its fourth quarter guidance. Officials said currency woes in Europe will shave about $100 million from fourth quarter earnings. That means Compaq earnings will be about 37 cents a share, compared to First Call Corp. consensus estimates of 41 cents a share.
Compaq gets a third of its revenue from Europe and is employing a hedging strategy to guard against currency fluctuations. Capellas said Compaq hedged the euro for the fourth quarter so it "could get on with business." Compaq is comfortable with revenue of $12.4 billion in the fourth quarter. For 2001, Compaq is comfortable with earnings estimates of $1.49 a share.
The slightly lower guidance, however, shouldn't distract you from Compaq's new momentum. Show me a company that hasn't been thumped by the euro. In fact, Compaq may have minimized damage by hedging the euro early. "The business is operating on plan," said Capellas. "We hedged to put a predictable limit on what our exposure would be."
The company delivered strong results across most of its product lines and all geographies. A key point on Compaq's conference call was that server sales were strong. The company's enterprise unit was fueled by server growth. Server sales grew 41 percent year-over-year to $1.6 billion. Officials said Compaq gained share in the profitable four- and eight-processor server market.
Don't overlook the server talk. Compaq has been historically seen as a PC play. If the company can be seen as a server and Internet infrastructure provider, Compaq shares may see a boost.
The perception wars
This is the tale of two stocks -- Nortel Networks (NYSE: NT) and Amazon.com (Nasdaq: AMZN).
Nortel delivered great results, but failed to pound the table enough with its outlook. Sales for the fourth quarter will merely grow in the low 40 percent range along with earnings per share.
In 2001, Nortel CEO John Roth figures the industry will grow in the low 20 percent range with his company growing earnings and revenue in the 30 percent to 35 percent range.
It's not enough. Investors are worried about capital spending declines. These worries zapped Nortel in afterhours trading and whacked JDS Uniphase (Nasdaq: JDSU) and other fiber optic companies. Nortel's guidance indicates the market may not be growing as fast as expected. In any case, Nortel is kicking some serious tail, but investors will be skittish over valuation and any potential hiccup in growth.
Now let's look at Amazon.com (Nasdaq: AMZN). Watch out for those Amazon bulls. The e-tailer reported a smaller-than-expected loss amid strong sales of $638 million. The company also projected fourth quarter sales of $950 million and $1.05 billion, about in line with estimates.
Amazon also moved to ease cash fears. Losses will narrow to less than 5 percent of sales, "perhaps substantially so." Amazon also expects to generate "significant positive cash flow from operations" for the nine months ending Dec. 31, 2001.
Amazon's carrots will be enough to bring back a little irrational exuberance. Has the fundamentally flawed business model changed? No. Will Amazon ever post a profit? Maybe. Nothing about Amazon has changed -- except the perception and the stock price. Amazon remains a nice trade and a scary company.TDAIN>