Compaq Computer is still reeling from its fall on Wall Street, and its once high-flying stock, which hit 74 a share in February, 1991, remains an outcast. After plunging as low as 22 in early December, the stock has attempted a feeble rally and is now meandering at around 27. Dismayed fans who once saw Compaq as a growth stock have abandoned the PC maker. But guess who's buying Compaq shares now? Value-stock investors.
Value players usually avoid fast-lane companies such as Compaq. They focus instead on companies whose stocks are selling below their intrinsic, or private-market, values. They calculate the value by looking at how rich or cheap the stock's multiple is relative to such factors as cash flow and book value.
"Based on our business-value method of analysis, Compaq's intrinsic worth could exceed $50 a share," says long-term value investor Mark Boyar, who manages about $150 million. He thinks Compaq now has the managerial talent and strategy to effect a major turnaround. So he sees the stock hitting 80 in the next two to three years.
Recent acquisitions in the computer industry, notes Boyar, show stock multiples of more than 4 times book value and 11 times cash flow. Price-earnings ratios were between 17 and 38. He figures that based on its current price, Compaq is now grossly undervalued, trading at just 1.2 times its book value of 22 a share, 4 times its 1990 cash flow of $6.85 a share, and 5.4 times its estimated 1992 cash flow of $5 a share. Compaq's current p-e is 18, Boyar says.
`A STEAL.' "These multiples are near Compaq's lowest valuation ranges," says Boyar. Moreover, if the company's $8 a share in cash and equities is deducted from the stock price of 27, "Compaq becomes even more of a steal at the adjusted price of 19 a share," he argues.
Boyar thinks the fundamental changes in the computer industry that bode ill for Compaq haven't permanently impaired the company. He says the company's repositioning of its personal computer division to broaden its product line to include low-cost, entry-level PCs will allow Compaq to compete head-on with the new market entrants and "should get the company back on track."
Despite current earnings pressure, other value players are also impressed with the company's solid balance sheet. They note that Compaq has very little debt, with a long-term debt-to-capital ratio mf only 3.8%. The company's financial strength, says another value investor, will enable it to push through a major restructuring. Compaq's financial strength, says another pro, means that it will be able to direct the necessary funds to the development of new leading-edge products.