DRIP PORTFOLIO

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Compaq vs. Dell
Is Compaq a good Drip stock?

by George Runkle (TMF Runkle)

Atlanta, GA (April 12, 1999) -- Last week, I covered a number of different performance measures useful for evaluating companies for possible investments as Drips. Now, once we calculate all those numbers, what do we do with them?

I like to use them to compare companies in the same industry, and also compare the company's performance year to year. This week, I'm going to compare Compaq Computer (NYSE: CPQ) to Dell Computer (Nasdaq: DELL). Compaq has a Direct Purchase plan that allows you to start for an initial investment of $250. You can get the details on Compaq's website (www.compaq.com), or on a website like Netstock Direct (www.netstockdirect.com). Dell does not have any kind of dividend reinvestment or direct purchase plan at this time, but it is an arch competitor of Compaq, which is why we are looking at it.

This year, Compaq's numbers were thrown off quite a bit by its acquisition of Digital Equipment. Earnings per share are negative because of acquisition costs, so to be fair, we will try to avoid anything thrown off by that action. Since I put everything in a spreadsheet, there were a few areas that stood out immediately that should be pretty much independent of this. These are the inventory conversion period, gross margins, and days sales outstanding.

Dell has a phenomenal inventory conversion period. It turns over its entire inventory to cash in 5.4 days according to my calculations. This is an improvement over an already impressive 8.2 days the company had last year. Compaq takes 23.2 days to do the same thing, which is slightly worse than last year's 23 days. If Compaq could get it's turnover down to Dell's time, it would be able to make do with about 75% less inventory on hand. That would free up $1.5 billion to invest elsewhere, which is quite a bit of money.

Let's take a look at gross margins. Compaq has had to do some aggressive cost cutting this past year to compete, which is no wonder. Trying to compete with a company like Dell has to be difficult. Dell maintains the low inventory partly by its direct sales. It doesn't manufacture a computer until an order has come in for it. It ships direct, so all the distribution and retailer costs are cut out. Because of this, Compaq has seen its gross margins drop this past year from 27% to 23%. How has Dell done? It has increased its gross margins from 22% to 23%. While both companies are running tight, Dell appears to be better structured to run lean.

The final measure I want to look at is the days sales outstanding. This measure tells us how many days a company has to wait after making a sale to see the cash. Obviously, the less time a company waits, the better, since it wants the money to use. Dell has days sales outstanding of 41.3 days. This is an improvement over last year's number of 63 days. Compaq looks very bad by comparison. Last year they had a respectable (compared to Dell) 42.3 days. This year it almost doubled to 80.8 days.

Not all the numbers for Compaq look bad, of course. The company has no long-term debt, and its current and quick ratios are fairly close to Dell's. However, its numbers still don't compare well in important ways to its arch competitor, Dell. I do have a direct purchase account with Compaq, but until I see some improvement in the company's financial performance, I plan on directing my investment dollars elsewhere. Next week I'll jump into the crossfire of the Cola War and take a look at Coke and Pepsi.

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4/12/99 Close

Stock    Close    Change
JNJ     99 5/8     +1 5/8
INTC    61 1/4     -4 1/8
CPB     40 1/4     +11/16
MEL     73 3/16    +15/16
           Day  Month    Year   History
Drip     (1.80%) 3.66%   3.97%   18.25%
S&P 500   0.76%  5.62%   10.53%  44.65% 
Nasdaq    0.22%  5.57%   18.52%  63.06%

Last Rec'd  Total #   Security    In At    Current
 02/01/99      8.092      CPB    $52.852   $40.250
 03/04/99      19.468     INTC   $40.130   $61.250
 03/09/99      9.076      JNJ    $74.910   $99.625
 03/08/99      6.977      MEL    $64.293   $73.188

Last Rec'd Total # Security    In At   Value    Change
 02/01/99    8.092     CPB    $427.68 $325.70 ($101.98)
 03/04/99    19.48     INTC   $781.24 $1192.41 $411.17 
 03/09/99    9.076     JNJ    $679.89 $904.20  $224.31 
 03/08/99    6.977     MEL    $448.56 $510.61  $62.05 


Base:  $2400.00
Cash:    $24.33**
Total: $3011.31

The Drip Portfolio has been divided into 100.036 shares with an average purchase price of $23.991 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however.

**Transactions in progress:
03/22/99: Sent $100 to buy more MEL.


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