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Compaq soars past 3Q sales, earnings estimates

Compaq Computer easily topped analysts' sales and earnings estimates in its third quarter Tuesday, raking in $550 million, or 31 cents a share, on sales of $11.2 billion.

First Call Corp. consensus expected the PC maker to earn 29 cents a share.

Compaq (NYSE: CPQ) shares closed off 70 cents to $27 ahead of the earnings report.

The $11.2 billion in sales marks a 22 percent improvement from the year-ago quarter when it earned $140 million, or 8 cents a share, on sales of $9.2 billion.

"Our results clearly demonstrate our tremendous momentum in the marketplace," said CEO Michael Capellas in a prepared release. "We increased gross margin and reduced expenses. And, most importantly, we are delivering the industry's broadest portfolio of innovative Internet products and solutions to our customers."

Excluding a $25 million gain from the sales of some of its Internet investments, Compaq earned 30 cents a share in the quarter.

Ahead of the earnings report, CS First Boston analyst Kevin McCarthy raised his six- to 12-month price target to $42.50 a share.

"We expect the company to report in line with the lower end of the (Wall) Street revenue range of $9.65-$9.85 billion," he wrote in a research note. "We also expect the company to report in line with the Street (earnings per share) estimate range of 25-29 cents."

Apparently McCarthy and the rest of Wall Street severely underestimated Compaq's growth this quarter.

Its commercial PC business reported sales of $3.5 billion up 28 percent from the year-ago quarter.

Consumer PC sales jumped 45 percent from the year-ago quarter to a robust $2.1 billion.

"Looking forward, we expect continued strong revenue growth," Capellas said in the release. "In 2001, we see earnings growth in excess of 40 percent, consistent with consensus estimates."

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.

In the third quarter, Compaq's service sales fell to $1.7 billion in the quarter, off 2 percent from the same period last year.

Sales into North America shot up 27 percent from the year-ago quarter while sales in to Europe, the Middle East and Africa improved 8 percent. Sales into the Asia-Pacific region shot up 41 percent with Japan and China accounting for growth of 52 percent and 21 percent, respectively.

Gross profit margins improved to 23.9 percent, up 0.7 percent from the year-ago quarter.

Its server sales rocketed up 41 percent to $1.6 billion. Storage sales increased 9 percent to $1.4 billion with enterprise storage sales improving 44 percent.

Last quarter, Compaq met analysts' estimates when it pocketed $387 million, or 21 cents a share, on sales of $10.1 billion.

Its shares fell to a 52-week low of $18.38 last October before rallying up to a high of $35 in August.

Twenty-two of the 28 analysts tracking the stock rate it either a "buy" or "strong buy."

First Call Corp. consensus expects it to earn $1.08 a share in the fiscal year.