PC inventories raising eyebrows on Wall Street

As PC makers make the turn into the home stretch of the year, investors are paying close attention to the dicey details of inventory buildup.

Computer manufacturers traditionally load up for the Christmas buying season. But now there are mounting concerns that Compaq Computer Corp. and Dell Computer Corp. are building up unusually large inventory surpluses in the channel.

Already, major resellers such as CompUSA are running full-page advertisements offering hundreds of dollars in discounts and vendor rebates for notebook computers, desktops and a slew of peripherals. That has raised eyebrows on Main Street and Wall Street, because these kinds of discounts don't usually appear so early in the season.

"Every year at this time of year we start to hear these concerns and it's really difficult to ascertain what it all means," said Jim Poyner, an analyst at Oppenheimer & Co. "But the magnitude of these ads popping up everywhere so early makes me wonder. And any time you have large price cuts, it's going straight to the bottom line."

Industry analysts have noticed a recent increase in Compaq's worldwide inventories, with it taking roughly five or six weeks to move the product through the reseller channel as opposed to three or four weeks in late September. That's still an improvement from last year's rate of 10 to 12 weeks, but it could be part of the reason Compaq's stock has slid more than 10 percent in less than a week.

On Wednesday, Compaq's stock gained $2.75 per share to $61.94. The stock has been in a steady decline since reaching its 52-week high of $78 per share.

"Right now, we have a "hold" rating on the stock and figure Compaq will do about 80 cents per share in the fourth quarter," Poyner said. "That's assuming PC sales hold true to the expectations."

First Call consensus expects Compaq to return a profit of about 82 cents per share in its fourth quarter.

The inventory problem is not unique to Compaq. Other vendors are also dealing with ballooning inventories. But Compaq official who hoped to turn over their inventory 15 times by the end of the year were running at a rate of about 10 coming out of the third quarter. That means Compaq will have to unload more than one-third of its inventory in a year that has seen sales grow by more than 50 percent.

Vanstar Corp., one of the largest PC resellers, has seen inventories swell in the past month, presumably in anticipation of the fourth-quarter blowout.

"Some people are saying that inventory levels are higher than usual right now, but who knows how big of a problem it might be," said Neal Johnson, an analyst who follows Vanstar for Robinson-Humphrey. "We always get a seasonal lift toward the end of the quarter, so I expect these inventories to move."

But these alleged inventory woes aren't stopping some brokerage firms from jumping on the PC bandwagon. Sands Brothers on Wednesday upgraded its rating on Dell from "neutral" to "buy," shrugging off the backlog. Dell's stock shot up $2.31 per share to $83.63.

"(Dell) just had great earnings and is expecting a great quarter," said Matthew Russo, an analyst at Sands Brothers. "If I was worried about inventories, why would I upgrade the stock?"

And that's the crux of the issue. It's virtually impossible to get a definitive answer. Most resellers don't divulge such details and the PC makers themselves aren't fessing up -- unless they have to.

That was the case with Micron Electronics Inc., which admitted on Monday that notebook sales were horrible and earnings would reflect the market's saturation.

"The thing with inventories this time is that we suspect this backlog is happening, but we don't know how important it is," said Scott Miller, a PC analyst at Dataquest Inc. "A lot depends on what type of inventory is backing up. If it's low-end retail systems in preparation for a big retail rush, that's not a problem. But if it's high-end machines, that's another story."

Regardless, Compaq officials have set a lofty inventory-turnover goal. If they meet it, they'll set record revenue and profit records for the year and the quarter. But if they come up shy, watch the panic set in.

"The odds are pretty long that they'll make their goal," Poyner said. "They haven't left a lot of room for error, and any time you fall short of any expectation, there's a price to pay."