Thursday, July 29, 1999
DJIA 10809.02 -163.05 (-1.49%) S&P 500 1344.41 -20.99 (-1.54%) Nasdaq 2654.60 -51.24 (-1.89%) Russell 2000 442.03 -4.58 (-1.03%) 30-Year Bond 88 17/32 -1 2/32 6.09 Yield

An Investment Opinion
by Louis Corrigan

Compaq's New CEO Comes In Slashing

Shares of troubled Compaq Computer (NYSE: CPQ) fell $3/4 to $25 3/16 this morning in a broadly depressed market despite new details after the bell Wednesday on some generally well-received restructuring plans designed to cut annual operating expenses by a staggering $2 billion. CEO Michael Capellas, promoted from COO just a week ago, also won points with investors for his candor as he announced that the world's largest PC manufacturer and bloated enterprise computing and services company would slash headcount to bring its cost structure more in line with a competitive marketplace.

The company also announced a second quarter loss of $184 million, or $0.10 per share, a penny per share ahead of estimates, which had been cut in June after Compaq indicated the Q2 loss would be $0.15 per share. At the time, analysts were expecting a profit of $0.20 per share -- though they should have known better given that Compaq was in disarray following the firing of former CEO Eckhard Pfeiffer and a spate of high-level resignations, including former CFO Earl Mason.

Revenues increased 17% on a pro-forma basis to $9.42 billion, driven in part by the 63% year-over-year increase in consumer computer unit sales, which translated into a 35% revenue gain in that segment. International Data Corp. (IDC) indicates Compaq gained 2.2 percentage points in U.S. PC market share versus the year ago period, to 16.6%. However, gross margins plunged to 20.5% from 24.7% in the first quarter due to price competition and some one-time costs related to discontinuing programs. Operating expenses also leaped to $2.2 billion from $1.9 billion in the first quarter due partly to increased promotions and additional accounts receivable allowances.

On the restructuring front, Capellas said the firm would let go 6,000 to 8,000 employees and take a related Q3 charge of $700 million to $900 million. These job cuts are expected to save Compaq $700 million a year. They come in addition to the 2,000 employees still to be cut as part of an earlier restructuring plan designed to lay off 17,000 workers. Taken together, the layoffs should leave Compaq's work force at perhaps 59,000. Such a massive employee purge speaks to just how bloated the company became as a result of its major acquisitions of enterprise computing firms Tandem and Digital Equipment Corp. over the past two years.

When first announced, these deals were wildly heralded as a way for Compaq to beef up its presence in the higher-margin, high-end corporate server market while diversifying into the market for hand-holding services like systems integration and troubleshooting. Compaq would be all things to all people. But it hasn't worked out that way. Enterprise computing revenues increased just 11% in Q2, despite strength in the storage and ProLiant server business, while services revenues rose only 6%, well below the industry average.

While Capellas' decisiveness is a positive, the question remains whether Compaq can meaningfully improve profits in the company's PC business. In May, the company reduced its distribution partners from 39 to just 4: Ingram (NYSE: IM), Merisel (Nasdaq: MSEL), Tech Data (Nasdaq: TECD), and Inacom (NYSE: ICO). Yet, Compaq's channel inventory still stands at 3.5 weeks, though that's an improvement from an average of 3.9 weeks in the first quarter. Even if it can slash that in half -- a major challenge -- Compaq will still be operating with twice the inventory of industry pacesetter Dell (Nasdaq: DELL), whose direct model will continue to provide it with a competitive advantage. Compaq now seems beyond the threat of an additional free fall, but Capellas has his work cut out for him.


Small business broadband and telecommunications services firm Network Plus Corp. (Nasdaq: NPLS) jumped up $2 9/16 to $17 7/8 on news of a partnership with Excite@Home's (Nasdaq: ATHM) @Work business division to provide its customers with high-speed Internet access. The company said it decided not to pursue a high-yield bond note placement because of unfavorable market conditions.

Women's apparel retailer bebe stores (Nasdaq: BEBE) bagged a gain of $1 1/16 to $29 7/16 after the company said fiscal Q4 EPS was $0.30, a dime better than last year and beating First Call's estimated $0.26. The company also said it increased the number of stores it plans to open in fiscal 2000 to 20 from 15, which would bring the chain's total to 120 at the end of the fiscal year.

Online discount brokerage Ameritrade (Nasdaq: AMTD) moved up $1 3/16 to $29 1/16 this morning. The company said it canceled a planned stock offering, instead announcing a proposed private placement of $200 million of subordinated convertible notes due 2004.

Semiconductor and electronic components storage and automated handling products maker Peak International (Nasdaq: PEAKF), which announced "major" contracts with Conexant (Nasdaq: CNXT) and Motorola (NYSE: MOT) -- details of which were not disclosed -- added $7/16 to $6 1/4 this morning. Fiscal Q1 EPS was $0.27, up from $0.23 last year.

Metropolitan market facilities-based carrier Focal Communications Corp. (Nasdaq: FCOM) tacked on $5/8 to $20 1/8 after rising $6 1/2 yesterday in the stock's first day of trading. The company sold 9.95 million shares to the public for $13 each.

Drug wholesaler AmeriSource Health Corp. (NYSE: AAS) gained $1 5/16 to $25 1/16 on news of fiscal Q3 EPS that met Wall Street's $0.41 estimates and came in ahead of the year-ago $0.34. "Revenue momentum continues to build and we should see an even stronger fourth quarter," said CEO R. David Yost.

Cellular imaging systems maker ChromaVision Medical Systems (Nasdaq: CVSN) shot up $3 7/16, or 30.6%, to $14 11/16 on news that the FDA cleared its automated cellular imaging system (ACIS), used to detect cancer, infectious diseases, and genetic conditions at the cellular level, for marketing.

Imaging and data storage technologies company Imation Corp. (NYSE: IMN) recorded a gain of $1 1/4 to $26 9/16 on news that the company expects second-half EPS of between $0.50 and $0.55. Wall Street was looking for about $0.52 for the next two quarters. Q2 earnings from continuing operations was $0.29, ahead of the $0.17 five analysts surveyed by First Call were expecting.

Houston-based barge operator Kirby Corp. (AMEX: KEX), which agreed to buy privately held Houston inland tank barge company Hollywood Marine for $325 million in cash and stock plus about $100 million in assumed debt, crept forward $1 3/8 to $19 15/16.

Contract electronics manufacturer Jabil Circuit (NYSE: JBL) rose $1 15/16 to $41 5/16 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive" based on "a 30% pullback in the stock over the past two months, despite a more than 10% increase for the overall EMS industry." Merrill Lynch reportedly upgraded the stock to "near-term buy" from "neutral."

Earnings Movers

Aurora Biosciences Corp. (Nasdaq: ABSC) up $5/8 to $8 11/16; Q2 EPS: loss of $0.03 vs. loss of $0.40 last year; estimate: loss of $0.24

Smith-Gardner & Associates (Nasdaq: SGAI) up $5/16 to $9 1/4; Q2 EPS: $0.12 vs. $0.09 last year; estimate: $0.09

ZDNet (NYSE: ZDZ) up $1 1/8 to $19 5/8; Q2 EPS: $0.01 vs. loss of $0.04 last year; estimate: breakeven


British drugmaker Glaxo Wellcome PLC (NYSE: GLX) fell $4 5/8 to $50 11/16 despite posting first half pre-tax profit of about $2.1 billion, which was reportedly at the high end of the range expected by analysts. However, the company added that it will not report double-digit earnings growth for the full year as it had hoped due to weakness for its migraine drug Imitrex and its anti-smoking product Zyban, according to Dow Jones.

Funeral home and cemetery operator Service Corp. International (NYSE: SRV) succumbed to a $1 13/16 loss to $15 1/4 after posting Q2 EPS of $0.28, down from $0.35 a year ago and a penny short of the Zacks mean estimate. The company also guided investors to expect full-year EPS between $1.14 and $1.20 (before charges), lower than the current $1.27 mean estimate. Merrill Lynch cut its near-term rating on the firm to "neutral" from "accumulate."

Trash hauler Waste Management (NYSE: WMI) was dumped $5 9/16 to $25 7/8 after ratcheting down its Q2 EPS expectations to $0.58 to $0.60, lower than the $0.67 to $0.70 range given earlier this month. The company blamed lower-than-expected operating results, delayed accounting changes, and higher interest expense for the lower guidance. Chase Securities and Donaldson, Lufkin & Jenrette have been hired to consider strategic alternatives. The company's general counsel and CFO both handed in their resignations.

Global telecommunications services firm Teleglobe Inc. (NYSE: TGO) dropped $5 1/16 to $21 11/16 after saying continued pricing pressure in the North American wholesale long-distance market will result in Q2 EPS from core operations of $0.10, short of the First Call mean estimate of $0.13. For the year, the company is expecting earnings to come in $0.04 to $0.14 below the mean estimate of $0.84. Deutsche Banc Alex. Brown cut its rating on the firm to "buy" from "strong buy."

Big Bertha golf clubs maker Callaway Golf Co. (NYSE: ELY) was shafted for a $1 loss to $12 1/16 after reporting Q2 EPS of $0.35, up from $0.30 a year ago and in line with analysts' mean estimate. However, the company said sales and earnings toward the end of the year will be negatively affected by softness in many golf club markets and costs associated with its new golf ball operation and Japanese distribution system.

Agricultural equipment maker AGCO Corp. (NYSE: AG) was plowed under for a $3/4 loss to $9 3/4 after posting Q2 EPS of $0.26, half of last year's $0.52. The company said a poor North American product mix, production cuts, lower pricing, and negative currency effects will lead to full-year 1999 earnings 75% below last year's results, although free cash flow should remain a positive $150 to $175 million. Analysts had only been expecting an earnings slide of roughly 50%.

Fast food restaurant chain Wendy's International (NYSE: WEN) was burned $1 7/8 to $28 3/8 after reporting Q2 EPS of $0.39 (including gains from asset sales), up from $0.34 a year ago and in line with a preliminary estimates from the company earlier this month. However, Morgan Stanley Dean Witter cut its rating on the firm to "outperform" from "strong buy."


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