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Analysts play tug-of-war over Compaq's future

As the second quarter comes to an end, analysts are still at odds over the financial and strategic health of the personal computer maker.

    As the second quarter comes to an end, analysts are still at odds over the financial and strategic health of personal computer maker Compaq Computer.

    Today, Salomon Smith Barney analyst Richard Gardner downgraded Compaq to "neutral" from "buy" and cut the company's near-term share price target to $25 from $45. Gardner cited perceived weakness in PC sales for the downgrade.

    The news hit Compaq's stock today. Shares fell $2.81, or close to 10 percent, to $25.69.

    Yet Merrill Lynch analyst Steve Fortuna decided to maintain his stance on the PC maker's shares, keeping guidance at near- and long-term "accumulate." Fortuna held that Compaq is "quite comfortable" with its current inventory levels and does not plan to change its pricing or sales strategy.

    Analysts across the board typically use the end of a quarter to assess the general performance of companies during the period. They often use that data to determine the future financial health of many players.

    Compaq, in many ways, has been a hot topic in the analyst community. The company is still recovering from a massive management shakeup last year, problems integrating two major acquisitions and missteps manufacturing and distributing commercial PCs. This series of events left many analysts pessimistic about whether Compaq would be able to recover.

    The company's commercial PC division has been losing money for a year, but the losses have been shrinking quarter-to-quarter. Compaq is making money in its consumer business but is gradually losing market share.

    Some analysts, however, see the tides turning as new CEO Michael Capellas continues his strategy to cut costs.

    Fortuna said Compaq has successfully worked out some of the kinks in its distribution model, and corporate sales look solid.

    "We believe (sales) will spike up in the second half of the year related to Windows 2000," he wrote in a research note, but conceded there could be short-term problems with consumer sales. Fortuna added, however, that slower sales won't "have significant material impact on Compaq's top line."

    Compaq is facing stiff competition from Hewlett-Packard in retail markets, a situation "which has definitely hurt sales," PC Data analyst Stephen Baker said.

    According to research by PC Data, HP is ahead of Compaq in overall retail market share (including catalog and online sales), 36 percent to 31.1 percent, respectively.

    Figures for in-store sales, such as Best Buy and CompUSA, show HP ahead of Compaq, 42.4 percent vs. 28.9 percent.

    Fortuna sees Compaq reporting $10 billion in revenue for the second quarter. He also sees 5 percent growth year-over-year, which represents "an improvement on the first quarter. We are looking for double-digit growth for the second half of the year."

    In March, market research company Gartner also rallied behind Compaq, arguing the company had successfully fixed most of the problems with its commercial PC business.

    The commercial division lost $19 million in the first quarter, an improvement over previous quarterly losses.