Compaq Sends Stocks Reeling With Report of Slipping Profit

Compaq Computer Corp., citing weaker demand and stiff price competition in sales to businesses, said Friday it would earn less than half the profit that analysts had been expecting for the quarter just ended.

That announcement, made after the market closed, sent shares in the biggest maker of personal computers down sharply in after-hours trading.

While Compaq’s rivals have also complained about slipping profitability as corporate computer prices follow home PC prices down, several observers said Compaq’s problems were largely its own doing.

“Compaq is going to be dead money for a while,” said Piper Jaffray analyst Ashok Kumar. “Our model has their unit shipments down 20% sequentially, and the industry as a whole is only down 10%” from the fourth quarter.

Still, the news drove down other computer-related stocks.

Compaq fell to $26 in after-hours trading from its closing price of $30.94 on the New York Stock Exchange. No. 1 direct computer seller Dell Computer Corp. sank to $40.13 from $43.56 at closing. And Intel Corp., which makes the microprocessors inside many of both companies’ machines, dropped to $126.25 from $130.81.

Compaq shares have lost nearly half their value since late January, before it warned of a slowdown in purchases by small and mid-size companies. The stock is at its lowest level since October.

CEO Eckhard Pfeiffer, however, said company executives still “fully intend” to increase Compaq’s market share this year, and do so profitably.

Compaq declined to elaborate on its latest projections or the basis for its continued optimism. It said total sales for the quarter should be about $9.4 billion, down from the fourth quarter but up sharply from $5.7 billion in the first quarter of 1998, when it earned $16 million, or a penny a share.

Detailed results are scheduled to be released April 21.

In the fourth quarter, Compaq’s share of the worldwide market for corporate desktop PCs increased to 17.7% from 17.3% a year earlier, while Dell’s climbed to 11.6% from 8.7%, according to International Data Corp.

But Compaq “stuffed the channel,” distributing more computers to resellers than demand warranted, according to Kumar and other analysts.

Under pressure from Dell, which saves money by keeping almost nothing in inventory and by eliminating the markup charged by retailers, Compaq has experimented with a combination of indirect and direct sales. After building a direct model for sales of its Prosignia line of small-business computers, Compaq recently reversed course and encouraged Ingram Micro Inc. and Tech Data Corp. to distribute more of them.

And Compaq is still waiting for the big payoff from its $9-billion acquisition of computer services provider Digital Equipment Corp.

Last month, Compaq completed its $220-million acquisition of Corona del Mar-based Shopping.com, an online retailer. Compaq bought the consumer products retailer to complement its AltaVista search engine, which has had ambitions as a portal.

“There has been a mismatch between their ambitions and what they were able to achieve,” said analyst Daniel Kunstler of J.P. Morgan.

Compaq, like other manufacturers, was hurt during the first two months of the quarter by consumers and companies waiting for the release of Intel’s new Pentium III chips. Some of those customers were seeking the increased performance of the chip, while others waited because they know that when the Pentium IIIs are fully in place, Pentium II-based PCs will drop in price.

Industry sales in the traditionally weak first quarter are expected to be even with a year earlier, Dataquest says.