Compaq shares closed up $1.80, or 9 percent, to $21.85 Wednesday after a pair of analysts upgraded the PC maker in the wake of its fourth-quarter earnings report.
Compaq (NYSE: CPQ) posted an operating profit of $515 million, or 30 cents a share, on sales of $11.5 billion, not exactly blowout numbers but better than the company and most analysts had expected.
Company executives reduced the company’s expected sales growth to between 6 percent and 8 percent in the fiscal year but said it was comfortable with the current First Call Corp. consensus profit estimate of $1.17 a share.
On Wednesday, several analysts issued positive comments not only about the fourth-quarter results but also about the company’s strategy to eschew market-share gains in favor of salvaging acceptable profit margins.
Lehman Brothers analyst Dan Niles upgraded Compaq from a “market perform” rating to a “buy” Wednesday, mainly on the strength of the company’s “realistic” revenue outlook and margin stability.
J.P. Morgan’s Walter Winnitzki boosted the stock from a “long-term buy” rating to a “buy” recommendation.
“The company will not chase market share but will continue to focus on making changes to improve its profitability, which will translate into slower but more profitable growth,” he wrote in a research note. “We believe the valuation should rise commensurate with the progress in transitioning to an enterprise systems company and note that it is currently only about one-half other comparable companies.”
Dell (Nasdaq: DELL), Apple Computer (Nasdaq: AAPL), Hewlett-Packard (NYSE: HWP) and Gateway (NYSE: GTW) have all warned of declining sales and earnings heading into 2001. Slowing demand, a general cooling of the economy and eroding profit margins have all conspired to cripple their earnings and respective stock prices.
Compaq is facing all of these same issues, but analysts said its mix of high-end computers, servers and services makes Tuesday’s earnings report more palatable.
Compaq executives said gross profit margins will actually improve in 2001 to around 25 percent, up from 23.5 percent in fiscal 2000, mainly because its enterprise sales can offset the diminishing margins in its core PC business.
In these uncertain times for PC vendors, even a modest increase in margins is a reason for optimism.
Underscoring the company’s preference for quality over quantity, International Data Corp. reported that while Compaq’s PC shipments only improved 4 percent in the fourth quarter, its PC sales improved 8 percent.
“We agree that the near term outlook is murky, but still like prospects for business spending on IT, particularly in 2H01 and particularly for Intel/NT servers,” said Mark Specker, an analyst at Wit SoundView, in a research note.
“The new dollars that Compaq generated in FY00 carry substantially higher gross margins and lower costs than the corporate average. The leverage this analysis suggests Compaq has regained in its business is striking.”
Specker reiterated his “strong buy” recommendation Wednesday.
S.G. Cowen’s Richard Chu wasn’t ready to give Compaq a thumbs-up at this point.
“First-quarter EPS guidance of $0.21 seems optimistic to us,'' he wrote in a note to clients. Given the reduced sales outlook, he said, the profit outlook “is dependent on significant improvement in gross margins, (and is) thus at risk given likely aggressive competitive pricing in the PC market.”
Analysts were also put off by Compaq’s net loss of $672 million, or 39 cents a share, in the quarter, mainly a product of its $1.8 billion charge to write-off losses from investments made in struggling companies such as CMGI (Nasdaq: CMGI).
As it stands now, First Call Corp. consensus expects Compaq to earn 20 cents a share in its first quarter and $1.17 a share in the fiscal year on sales of $46.3 billion.
The stock moved up to a 52-week high of $35 in August before slumping to a low of $14.30 in December.
Nineteen of the 27 analysts following the stock maintain either a “buy” or “strong buy” recommendation.>