Monday, April 12, 1999
DJIA 10189.65 +15.81 (+0.16%) S&P 500 1343.20 -5.15 (-0.38%) Nasdaq 2571.03 -22.02 (-0.85%) Russell 2000 406.16 +0.30 (+0.07%) 30-Year Bond 97 10/32 +12/32 5.43 Yield

An Investment Opinion
by Warren Gump

Compaq Hits PC Stocks

The earnings warning from Compaq Computer (NYSE: CPQ) after the close of the market on Friday created a dive in PC stocks this morning. While Compaq was hardest hit, falling $6 11/16 to $24 1/4 per share, other players had their stock price pierced. In midday trading, Dell Computer (Nasdaq: DELL) was down $2 9/16 to $41, Gateway (NYSE: GTW) fell $3 5/8 to $69 1/8, IBM (NYSE: IBM) was hit $4 11/16 to $181 5/8, Hewlett-Packard (NYSE: HWP) lost $4 1/2 to $65 1/8, and Intel (Nasdaq: INTC) short-circuited $4 3/16 to $61 1/4.

The raging debate is currently whether other PC makers have been unjustifiably hit by the adverse news from Compaq. Are the problems experienced by Compaq isolated to the company because of management missteps or is the problem broad- based and about to hit the rest of the industry?

My initial take, having read the Compaq's press release and being aware of the company's history, is that most of the problems affecting the company are related to management missteps. Reports of some inventory stuffing at the end of the fourth quarter combined with channel conflicts between the company's distributors and its direct sales efforts seem to have been the primary issues causing this quarter's problems. A drop in overall corporate demand, even if slight, would exacerbate these company-specific problems.

While most of Compaq's woes appear to be its own making, competitors are not necessarily well-positioned in the short term. Compaq is the world's largest PC maker. If it seeks to maintain its market position (which it seems to plan on attempting), competition and pricing pressure will intensify, hurting all of the box makers. Even though these stocks have dropped some today, most of their stocks have been discounting unfettered rapid earnings growth. Until the scene clears up, both in terms of Compaq's strategic reaction to its problems and concerns of a slowdown in corporate growth, I would be inclined to sit on the sidelines and figure out exactly where this industry is heading.


Ford Motor Co. (NYSE: F) drove up $1 1/16 to $61 5/8 after announcing that it will buy Kwik-Fit, the largest independent vehicle maintenance and light-repair chain in Europe, for about 1 billion pounds, or $1.6 billion, in cash. The world's second-largest auto maker said the purchase will expand its ability to reach new customers by servicing older and non-Ford vehicles. Kwik-Fit has more than 1,900 service locations in the U.K., Ireland, and continental Europe.

Entertainment and media giant Walt Disney Co. (NYSE: DIS) moved up $7/8 to $35 3/8 on reports in The Wall Street Journal that the company is considering ways to package its Internet assets, including its 43% stake in Infoseek (Nasdaq: SEEK), into a separate publicly traded entity. Disney has also begun talks to take majority control of Infoseek sooner than the 2001 originally agreed to by the two companies. Media rivals Time Warner (NYSE: TWX) and CBS Corp. (NYSE: CBS) have recently said they're also considering converting Internet holdings into separate companies. Infoseek took $4 1/8 to $81 1/2 this morning.

Online entertainment-related products retailer Big Entertainment (Nasdaq: BIGE), meanwhile, won $5 3/4 to $21 1/2 after CBS agreed to take a 35% stake in a new joint venture company that will own movie and entertainment-themed website hollywood.com in exchange for $100 million worth of CBS promotion and content. CBS has entered into similar agreements with Sportsline USA (Nasdaq: SPLN) and MarketWatch.com (Nasdaq: MKTW).

Hospitality, broadcasting, and cable company Gaylord Entertainment Co. (NYSE: GET) added $3 7/16 to $26 13/16 after CBS agreed to buy KTVT-TV, CBS' Dallas-Ft. Worth affiliate, for $485 million in stock.

Office products company US Office Products (Nasdaq: OFIS) added $2 to $5 7/8 after its Mail Boxes Etc. subsidiary announced a five-year shipping and delivery services agreement with online auctioneer eBay (Nasdaq: EBAY) and Web-based e-commerce shipping company iShip.com. Shares of eBay were bid up $7 1/2 to $190 7/8.

Healthcare management and services company MedPartners Inc. (NYSE: MDM) rose $5/8 to $5 1/2 this morning. The company on Friday night said it reached an agreement with the State of California regarding the company's physician management operations in the state. SG Cowen & Co. upgraded the stock to "buy" from "neutral" today, while U.S. Bancorp Piper Jaffray did the same and set a $7.50 12-month share price target.

Diversified manufacturer Tyco International (NYSE: TYC) improved $3 to $77 9/16 following comments by Chairman Dennis Kozlowski in Barron's that from internal growth alone -- without acquisitions -- the company will be able to nearly double its sales to $40 billion and boost earnings by 20% to 25% per year over the next five to six years. This week's Barron's has Kozlowski on the cover as "the Next Jack Welch," a reference to the legendary head of General Electric (NYSE: GE).

Cellular services company Shared Technologies Cellular (Nasdaq: STCL) got $2 3/4 to $11 1/16 after Lone Star Asset Management analyst Bill Mauerman set a "strong buy" rating on the shares. Mauerman has a $45 per share 12-month price target. "Investors have overlooked WCOM's [MCI WorldCom (Nasdaq: WCOM)] entrance into the cellular market by partnering with STCL for a co-branded prepaid cellular offering,'' said Mauerman.

Heavy equipment maker Caterpillar Inc. (NYSE: CAT) crawled up $2 to $50 3/4 after Merrill Lynch boosted its near-term "accumulate" from "neutral," setting a $57 per share price target and maintaining a long-term "buy" rating.


Nuclear aircraft carrier and submarine builder Newport News Shipbuilding (NYSE: NNS) was torpedoed for a $2 15/16 loss to $27 13/16 after The Wall Street Journal reported that Defense Department officials will try to block the company's proposed merger with fellow Navy shipbuilder General Dynamics (NYSE: GD) due to national security concerns over the ongoing consolidation of the defense industry.

Thrift holding company Golden State Bancorp (NYSE: GSB) fell $1 15/16 to $22 5/16 after a Federal claims court decided that the government should pay $909 million in restitution and damages for breach of contract related to a supervisory goodwill lawsuit brought by Glendale Federal Bank, which has since been absorbed by Golden State. However, the court refused to award damages for lost profits, which some observers had expected would bring the total award to as much as $2 billion.

Wound treatment programs operator Curative Health Services (Nasdaq: CURE) was sliced $3 5/32 to $4 29/32 after the Justice Department joined a whistleblower suit against the company and hospital operator Columbia/HCA (NYSE: COL), alleging that Columbia and Curative worked together in a kickback scheme to defraud Medicare. Curative said it will "defend itself vigorously" against the charges. Columbia fell $3/8 to $20 7/16.

Wireless communications high power radio frequency (RF) power amplifiers maker Spectrian Corp. (Nasdaq: SPCT) was zapped for a $1 9/16 loss to $8 3/4 after saying higher manufacturing costs, order delays, and weak market conditions will result in fiscal Q4 revenues down 20% to 28% from last year's levels and a loss between $1.75 and $1.95 per share, worse than the Zacks mean estimate of a loss of $0.40 per share.

E-business software company Segue Software (Nasdaq: SEGU) slid $11/16 to $6 after saying its Q1 revenues will come in between $8.3 million and $8.8 million, essentially flat with last year's $8.6 million. The company also said revenue reversals due to certain "non-compliance with the company's policies" have prompted it to lower its reported Q4 loss to $0.10 per share from $0.02 per share and lower its Q3 EPS to $0.07 from $0.10.

Online community operator theglobe.com (Nasdaq: TGLO) lost $6 9/16 to $72 3/8 on dilution fears after announcing that it intends to sell 4 million common shares in a secondary offering, including 2 million shares to be sold by existing shareholders.

Telecommunications equipment supplier Lucent Technologies (NYSE: LU) was knocked down $3 1/16 to $60 9/16 following a downgrade to "hold" from "buy" from SoundView Technology Group.

Information search and retrieval software developer Excalibur Technologies (Nasdaq: EXCA) was cut $1 3/8 to $17 3/4 after CE Unterberg Towbin changed its opinion on the stock to "long-term buy" from "buy," which is apparently a bad thing.

Non-laser vision correction products maker KeraVision Inc. (Nasdaq: KERA) was blindsided for a $5/8 loss to $12 11/16 following a Goldman Sachs downgrade to "market outperform" from "recommend list."


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