Compaq Expects Profit to Drop; Stock Slides : Computers: The firm’s prediction for the 4th quarter is the latest in a series of announcements that upset Wall Street.
Compaq Computer Corp., which has enjoyed years of stellar growth, became the latest victim of the computer industry’s woes Thursday when it announced that fourth-quarter earnings will be less than a year ago due to a slowdown in U.S. sales.
The news represents the first time in five years that the personal computer maker’s quarterly profits have failed to exceed those of the prior year’s period. Last year the Houston-based company posted profits of $91.9 million on sales of $667.6 million in the final three months, and analysts had generally been estimating that this year’s fourth-quarter earnings would top $105 million.
However, in the wake of Thursday’s announcements, analysts lowered their projections to between $62 million and $80 million for the final quarter.
Compaq’s disclosures sent its stock tumbling more than 15%, dropping $16.875 to close at $89.125 on the New York Stock Exchange, where it was the most actively traded issue. Other technology stocks, including International Business Machines, Apple Computer, Microsoft and Hewlett-Packard, also fell, as fears that the forces behind Compaq’s problems would affect a wider range of high-tech companies.
The announcement was the second in two weeks from Compaq to stun Wall Street and send its stock skidding. Last week the company posted disappointing third-quarter profits and revealed that a flaw in the microprocessor for its top-of-the-line personal computer would probably delay shipments. In the last two weeks, Compaq’s stock has dropped $19.50.
“It’s been an amazing fall from grace,” said Peter Rogers, a technology analyst at Robertson, Stephens & Co., a San Francisco brokerage. “As far as Wall Street is concerned, the bloom is off the rose.”
Although the industrywide sales slowdown has affected a wide range of computer makers throughout most of the last year, Compaq had seemed immune from the problems to many analysts. The tightly managed and sharply focused company has traditionally made the hottest-selling products in today’s market: high-powered desktop models and portables.
However, in its announcement Thursday, the company said sales last month were 10% below its expectations, with no sign of immediate improvement for the remainder of the year. Still, the company said it expects the problems to be resolved by 1990.
“This is a fourth-quarter issue and when that’s over, these problems should be gone,” said Michael Swavely, president of Compaq North America.
Swavely listed three primary causes of the company’s current problems: slower growth of personal computer sales in the United States; the current transition in Compaq’s product line, and uncertainity about the availability of Intel’s 486 microprocessor needed for Compaq’s new top-of-the-line PC scheduled for unveiling Monday. Intel acknowledged last week that two design flaws will delay volume production of the chip until late this month.
In addition, Swavely acknowledged that aggressive price cutting by IBM on certain PC models has cut into the company’s sales.
According to Scoreboard, a Dallas market research firm, IBM has moved ahead of Compaq in sales of high-powered desktop machines containing the Intel 386 microprocessor. IBM’s share of this market, which Compaq has dominated for the last year, climbed to 38% in the third quarter, compared to 35% for Compaq.
The aggressive competition among PC makers has been sparked in large part by the falling rate of sales growth in the United States. According to Scoreboard, sales growth in the first three months of 1989 was 26% above that of the prior year’s quarter. In the second quarter, the rate was 11% higher, but in the third quarter it was just 5%.
“In the long term, nothing has changed for Compaq,” said Richard Shaffer, editor of an industry newsletter. “The technology still favors the type of machine that Compaq produces. But this news just shows that the slowdown has finally caught up with Compaq, and that even the strongest companies in the industry aren’t immune.”
