Compaq reports record sales

Compaq Computer today reported record sales of $6.5 billion for its third quarter, reflecting a strong start for its build-to-order model.

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Compaq Computer (CPQ) today reported record sales of $6.5 billion for its third quarter, reflecting a strong start for its build-to-order model.

The company also announced a 3 cents per-share quarterly dividend and a two-for-one stock split. After the stock split, the quarterly dividend becomes 1.5 cents per common share.

For the quarter ending September 30, sales increased 31 percent Compaq at a glance over the same period last year. Revenue in the year-ago quarter was $4.48 billion. Net income increased by 54 percent to a record $562 million or 71 cents per share, excluding a $44 million or 6 cents per share non-recurring charge for merger-related costs.

Net income after the non-recurring charge for the merger related costs was $517 million or 65 cents per share.

Analysts expected the computer maker to report profits of 68 cents a share, according to First Call, up from earnings of 50 cents per share for the same quarter a year ago.

"Our new distribution focus has enabled Compaq's volume to grow more than three times the industry's rate while increasing profitability," president and CEO Eckhard Pfeiffer said in a statement.

Compaq has seen strong demand for its build-to-order desktops, Richard Chu, an analyst at Cowen & Company, said in a recent report. He estimated that total commercial desktop unit volumes in the third quarter grew more than 75 percent and 30 to 35 percent sequentially.

Going forward, Chu said, a new round of build-to-order models, which include Intel's Pentium II, should bolster the fourth quarter. He also noted that the back-to-school season has driven sales of Presarios.

Since July, Compaq's stock has been on a run, gaining about 100 percent by the end of September to reach as high as 79-9/16. It has since tapered, ending the day at 77-1/4, up from yesterday's close of 73-5/8.

Analysts expect consolidation to continue propelling the multibillion-dollar company forward, as big PC manufacturers often have competitive advantages over smaller rivals with economies of scale: a wider variety of products to offer customers, in addition to better prices, service, and support.

For example, Compaq, in an attempt to bolster its position as a provider of computing solutions for enterprise networks, recently acquired Tandem Computers.

Compaq is evolving from a PC vendor into an enterprise systems player, said Chu. He noted that, along with the transition, the company is revamping its supply-chain model, which is experiencing strong demand.

So even though Compaq's stock has risen sharply in recent months, Chu continues to believe the stock offers good appreciation potential.

"As this process unfolds, we can be certain that Compaq will be one of the biggest beneficiaries, positioned enviably to drive significant share gain in the PC [market], as well as build significant share in the much larger overall computer systems arena," he said.

Other analysts agreed that companies offering a fuller supply of products will be the ones that benefit. That's because the price of the PC only makes up about one-third of the decision, said Jeff Baker, an analyst with Principal Financial Securities. He said customers want full product solutions that include servers, networking, notebooks, and desktops.

"Companies that can offer that, those companies will continue to take market share, and more consolidation will follow."

The company recently upped its revenue goal for the year 2000 to $50 billion, from $40 billion, and analysts say that also is encouraging.

Chu said though Compaq's goal is more aggressive than his present expectations, it certainly seems to be an achievable target.

"These seem to us to be very plausible ranges, given the strength of the Compaq brand name and its global logistics and scale advantages, relative to all other competitors," he said.

Reporter Michael Kanellos contributed to this report.