Compaq soars past 3Q estimates

Sales and earnings more than adequate for computer giant
Written by Larry Barrett, Contributor on

Compaq Computer easily topped analysts' sales and earnings estimates in its third quarter Tuesday, raking in $550m, or 31 cents a share, on sales of $11.2bn.

First Call consensus expected the PC maker to earn 29 cents a share.

Compaq shares closed off 70 cents to $27 ahead of the earnings report. The $11.2bn in sales marks a 22 percent improvement from the year-ago quarter when it earned $140m, or eight cents a share, on sales of $9.2bn.

"Our results clearly demonstrate our tremendous momentum in the marketplace," said chief executive Michael Capellas in a prepared release. "We increased gross margin and reduced expenses. And, most importantly, we are delivering the industry's broadest portfolio of innovative Internet products and solutions to our customers."

Excluding a $25m gain from the sales of some of its Internet investments, Compaq earned 30 cents a share in the quarter.

Ahead of the earnings report, CS First Boston analyst Kevin McCarthy raised his six to 12-month price target to $42.50 a share.

"We expect the company to report in line with the lower end of the [Wall] Street revenue range of $9.65-$9.85bn," he wrote in a research note. "We also expect the company to report in line with the Street [earnings per share] estimate range of 25-29 cents."

Apparently McCarthy and the rest of Wall Street severely underestimated Compaq's growth this quarter. Its commercial PC business reported sales of $3.5bn up 28 percent from the year-ago quarter.

Consumer PC sales jumped 45 percent from the year-ago quarter to a robust $2.1bn.

"Looking forward, we expect continued strong revenue growth," Capellas said in the release. "In 2001, we see earnings growth in excess of 40 percent, consistent with consensus estimates."

The only glitch with Compaq was its fourth quarter guidance. Officials said currency woes in Europe will shave about $100m from fourth quarter earnings. That means Compaq earnings will be about 37 cents a share, compared to First Call consensus estimates of 41 cents a share.

Compaq gets a third of its revenue from Europe and is employing a hedging strategy to guard against currency fluctuations. Capellas said Compaq hedged the euro for the fourth quarter so it "could get on with business". Compaq is comfortable with revenue of $12.4 billion in the fourth quarter. For 2001, Compaq is comfortable with earnings estimates of $1.49 a share.

In the third quarter, Compaq's service sales fell to $1.7bn in the quarter, off two percent from the same period last year.

Sales into North America shot up 27 percent from the year-ago quarter while sales in to Europe, the Middle East and Africa improved eight percent. Sales into the Asia-Pacific region shot up 41 percent with Japan and China accounting for growth of 52 percent and 21 percent, respectively.

Gross profit margins improved to 23.9 percent, up 0.7 percent from the year-ago quarter.

Its server sales rocketed up 41 percent to $1.6bn. Storage sales increased nine percent to $1.4bn with enterprise storage sales improving 44 percent.

Last quarter, Compaq met analysts' estimates when it pocketed $387 million, or 21 cents a share, on sales of $10.1bn. Its shares fell to a 52-week low of $18.38 last October before rallying up to a high of $35 in August. Twenty-two of the 28 analysts tracking the stock rate it either a "buy" or "strong buy".

First Call consensus expects it to earn $1.08 a share in the fiscal year.

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