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Compaq plunges on downgrade
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June 29, 2000: 6:03 p.m. ET
Salomon Smith Barney cuts rating on revenue, inventory concerns
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NEW YORK (CNNfn) - The stock of Compaq Computer, the world's largest maker of PCs, plunged more than 12 percent Thursday afternoon after an analyst downgraded the stock because of concerns about the company's revenue and inventory held by retailers.
Compaq (CPQ: Research, Estimates) dropped 3-1/2 to 25 on high volume after Salomon Smith Barney analyst Richard Gardner downgraded the stock to "neutral" from "buy" and lowered his near-term price target to $25 from $45. It was the most actively traded stock on the New York Stock Exchange.
In a research note issued Thursday, Gardner said that U.S. retail PC sales have been weak and that he believes Compaq carries the most inventory in its distribution channel among the major PC vendors, giving the company more exposure to sluggish sales or declining prices.
"Inventory buildup may have near-term negative impact on PC margins," Gardner said in his report. The analyst placed his revenue and earnings per share estimates for the company under review.
The Salomon Smith Barney report triggered a response from Compaq Chief Financial Officer Jesse Greene and a Merrill Lynch analyst, both of whom disagreed strongly with its conclusions.
Compaq's Greene on Thursday said that the company is "comfortable with channel inventory levels."
"Compaq's channel inventory has been low and in some cases near stock-out levels," Greene said. "The second quarter has been very back-end loaded due to supply constraints early in the quarter."
Greene went on to say that Compaq has not changed the amount of standard price protection it offers to customers or made any adjustments to its "normal course of business."
Merrill Lynch analyst Steve Fortuna issued a research note Thursday saying that he saw no reason that investors should change their outlook on Compaq.
"We just spoke with the company in relation to a competitor's downgrade," the Merrill research note said. "We believe there will be no material change to guidance."
Fortuna expects Compaq to have second quarter revenue of $10 billion, which would be 5 percent above the same period last year and above the first quarter's total. He is forecasting double-digit revenue growth for the second half of the year.
In what may be a sign of things to come, eMachines, the third-leading seller of PCs through U.S. retailers, warned on June 19 that it would incur a second-quarter operating loss that was substantially more than analysts had expected. Executives of eMachines (EEEE: Research, Estimates) in Irvine, Calif., attributed the reduced forecast primarily to lower-than-expected demand for low-end PCs and a build-up of inventory among retailers. 
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