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Analysts skittish ahead of Compaq earnings

A UBS Warburg analyst lowers estimates for the PC giant, while others reiterate the weakness hitting the overall industry.

Saying he expects Compaq Computer to disappoint investors, UBS Warburg analyst Don Young lowered estimates on the PC giant Tuesday for the second quarter.

Compaq is scheduled to report second-quarter results during the week of July 23. First Call consensus calls for a 4-cent-per-share profit on revenue of $8.8 billion.

Young said in a research note that he now expects the company to report revenue of around $8.8 billion and earnings of 3 cents per diluted share. Those earnings results would be lower than Compaq's previous projections

He expects the enterprise group and the access group, which covers consumer and commercial PCs, to have particularly weak quarters, citing continuing slowness in the PC market, an ongoing price war and inventory issues specific to Compaq.

The company has been working on reducing the amount of inventory in the channel with distributors and retailers. That will help Compaq out in the long term but could prompt short-term charges.

Young did applaud Compaq's plans to re-engineer its business. CEO Michael Capellas outlined the changes in a June 12 memo to employees, calling it a "major shift" for the company. The company's goal will be to become "the leading IT solutions provider," delivering software, products and services to its customers, according to the memo.

"But with the combination of the current pricing environment and weak macro-economic setting, there remains near term earnings risk for all the PC hardware players in the commercial market," Young wrote.

Stock price from July 2000 to present.  
Source: Prophet Finance
In a separate note regarding the PC sector, Young wrote that Microsoft could be the only company to benefit from the price war, although he did think Gateway and Apple could escape relatively unscathed. Gateway recently escalated a price war with an advertising campaign that Young said is "raising store visits while also enabling higher pricing."

But Young is not alone in expressing concern about the sector. Salomon Smith Barney analyst Rich Gardner cut estimates on Compaq, Gateway and Dell Computer last month, citing continuing slowness in Europe and in the United States, and PC pricing issues.

Merrill Lynch analyst Steve Fortuna said in a report Tuesday that global PC demand in 2001 is likely to remain weak.

Fortuna said he anticipates second-quarter worldwide unit growth to decline 2.1 percent with the United States seeing a drop of 12.5 percent year over year.

Dell was his top pick as the company most likely to emerge unharmed by the decline, "due to its increasing mix of enterprise-class products."