Overstocked Compaq Faces Earnings Loss

Compaq Computer Corp., the world’s No. 1 personal computer maker, has too much PC inventory and will have to write down the value of the machines, which could lead to a loss in the second quarter, an analyst said Tuesday.

The company has four weeks’ worth of inventory at distributors and four weeks in its own warehouses, said analyst Ashok Kumar of U.S. Bancorp Piper Jaffray. He said the loss could be more than 10 cents a share, contrasted with his forecast for a 3-cent profit. Analysts polled by First Call Corp. expect earnings of 22 cents for the Houston-based company.

Compaq’s first-quarter profit was about half what analysts expected because of price cutting and weak corporate demand. The company ousted Chief Executive Eckhard Pfeiffer and has streamlined its distribution to try to whittle down costs and compete better against Dell Computer Corp., Hewlett-Packard Co. and International Business Machines Corp.

“It’s in the company’s best interest to take a kitchen-sink write-off and start with a clean slate,” Kumar said. “This way it gets blamed on prior management.”

When PC inventory goes unsold, it rapidly declines in value. Rival PC maker Dell, which sells directly to customers and doesn’t go through distributors or retail stores, carries just a week of inventory.

The company declined to comment.

Compaq stock has tumbled more than 50% from a high of $51.25 in January, making it the fifth-worst performer in the Standard & Poor’s 500-stock index this year. The shares fell 94 cents to close at $22.94 on the New York Stock Exchange and were the fourth-most active in U.S. markets.

“A loss would be unexpected, but at $23 a share, what is the downside?” said Phil Schettewi, chief portfolio strategist at Loomis, Sayles & Co., which owned 4.5 million Compaq shares as of March 31. “The stock has already discounted a lot of problems.”