Wall Street shrugs off Compaq warning

Analysts are blase about the computer maker's news that it will miss estimates for the first quarter and cut 5,000 jobs.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
4 min read
Analysts on Friday gave a group shrug to Compaq Computer's news that it would miss estimates for the first quarter and cut 5,000 jobs.

Given the economic climate and warnings from other tech companies, analysts said, the news was hardly surprising. But there were mixed opinions as to how well positioned the PC company is for recovery.

Shortly after the opening bell Friday, Compaq's stock was down only slightly, off 25 cents to $18.25 on brisk trading of 3.5 million shares.

Compaq's warning Thursday came as a surprise to no one; analysts had already lowered estimates in anticipation of the news. The Houston-based company said first-quarter revenue should be between $9 billion and $9.2 billion, 4 percent lower than last year and below the $9.6 billion previously predicted. Earnings per share are expected to be between 12 cents and 14 cents, flat from a year ago and below the First Call consensus of 17 cents per share.

Compaq blamed the shortfall on the slowing economy, as well as pricing pressure in PC sales. The company announced plans to trim 5,000 jobs, about 7 percent of its work force, as part of restructuring aimed at cutting costs.

The news came on top of warnings from just about every other major player in the technology field, prompting at least one analyst to warn investors away from the entire sector.

"We continue to recommend that those who do not have to invest in technology, don't," wrote Lehman Brothers analyst Dan Niles. Niles cut 2001 earnings estimates from $1.15 per share to 55 cents.

But on the positive side, a few analysts noted that the preannouncement had already been factored into Compaq's share prices, meaning that there was a lower risk of a precipitous drop in prices, barring some unforeseen event.

There was disagreement on whether the company was well positioned to move once spending begins to pick up. Of particular concern was Compaq's strength in the high-end server markets, as well as the overall strength of the overseas markets.

Robertson Stephens analyst Eric Rothdeutsch maintained a "buy" rating as well. Rothdeutsch lowered 2001 estimates from $1 per share to 85 cents per share, and 2002 estimates from $1.25 to $1.10 per share.

While Rothdeutsch noted "few reasons for optimism over the next couple of quarters," the company's strong position in servers and storage "should serve the company well once spending resumes."

He also applauded Compaq's efforts to trim costs, as did Merrill Lynch analyst Steve Fortuna, who said that the company "has done an admirable job with respect to improving management accountability, operational efficiency and Street credibility." Fortuna maintained an "accumulate" rating on the stock and lowered first-quarter earnings forecasts from 18 cents to 12 cents per share. He also cut 2001 estimates from $1.05 per share to 55 cents.

Compaq vs. Dell
Compaq has been in a price war with Dell Computer in the PC market, and "given the unenviable choice between market share and profitability," Compaq chose to stick with profits, said ABN AMRO analyst Bill Shope. But Compaq has now begun to see weaker demand and aggressive pricing in its Windows server business, and Shope expressed concern that Dell was beginning to take share there as well as Compaq "intends to price aggressively to defend its share, once again sacrificing profitability."

And U.S. Bancorp

Gartner analysts Mark Margevicius, John Enck and George Weiss say that considering the economic climate, Compaq's announcements will only strengthen its long-term prospects.

see commentary

Piper Jaffray analyst Ashok Kumar noted that although the company is increasing its focus on the enterprise segment, "it still derives half its revenues from PCs."

Compaq is well positioned if Windows 2000 is successful in the enterprise market, Kumar said. But Dell's aggressive pricing in the high-density rack server market, combined with "the implosion of .coms and slow down in the service-provider segment have impacted the growth rate of this segment," he wrote in a research note.

ABN AMRO's Shope cut estimates for the first quarter from 21 cents per share to 13 cents and full-year estimates from $1.14 to 79 cents per share, and maintained a "hold" rating.

Also at issue is weakness in Europe and Asia. Compaq executives told analysts that they expect to see continued growth in those markets, although there could be some pressure. However, the company does not see things getting as bad as they are in North America.

If Europe does slow down, Compaq "numbers could go even lower," noted Morgan Stanley analyst Gillian Munson.

Munson maintained her "outperform" rating on the stock, but lowered her price target to $26 from $30. In addition, she cut first-quarter earnings estimates from 17 cents per share to 14 cents and 2001 estimates from $1.07 per share to 85 cents.

J.P. Morgan analyst Walter Winnitzki maintained a "buy" rating on the stock, lowering his first-quarter estimates to 13 cents per share from 17 cents and 2001 estimates from $1 to 78 cents per share. For 2002, he lowered estimates from $1.25 per share to $1.10 per share.