ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, March 2, 1996 TAG: 9603040018
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: EVAN RAMSTAD ASSOCIATED PRESS
Compaq Computer Corp. roiled the industry Friday with a bold move to sacrifice profits in an effort to grow faster than anyone else, signaling a price battle that could severely damage some rivals.
The leading maker of PCs announced a lower profit rate for the first half of the year, saying it would cut prices to meet an internal sales growth target that exceeds expectations for the rest of the PC industry.
While the move hurts Compaq's short-term performance, it could be far more ominous for competitors, particularly those with smaller profit margins.
Companies that want to keep up or gain ground on Compaq are forced to sell at lower prices. If they cut now and can't lower costs, their profits will suffer, too.
``This provides us with the opportunity to be the leader in setting price and setting position,'' said Daryl White, chief financial officer of Compaq. ``To the extent that hurts our competition, well that's what it's designed to do.''
Wall Street analysts downgraded recommendations for several PC stocks, saying Compaq's move would reduce the entire industry's profitability.
Compaq's stock price plunged $8.871/2 to $41.75 on the New York Stock Exchange, an 18 percent dive. Shares in Gateway 2000 and Dell fell more than 10 percent while Apple, Hewlett-Packard, IBM and AST share prices dropped less dramatically.
``It's really a mutual suffering ... The end result is you have fewer credible companies left in the business by the end of the year,'' said Kevin McCarthy, analyst at NatWest Securities in New York.
``Profitability suffers in the short term, but when they come out of it, there will be fewer companies and they will be in position to perform more profitably,'' he said.
Although Compaq said its profit rate would decline, higher sales should mean a flat to slightly better profit compared to last year.
Compaq is responding to the low prices Hewlett-Packard Co. and International Business Machines Corp. have used recently to arrest its sales momentum to businesses and government agencies, particularly in North America. Compaq will roll out a new line of PCs for the commercial market Monday, and they will reflect its lower pricing.
``They were overdue for realignment of their prices, and they were starting to lose some business,'' said Richard Zwetchkenbaum, analyst at International Data Corp. in Framingham, Mass.
At greatest risk are Dell Computer Corp. and Gateway 2000 Inc., which sell directly to businesses and already have slimmer margins than Compaq.
Apple Computer Inc. and AST Research Inc. also will be squeezed. If Compaq also drops prices to consumer models, Packard Bell Electronics Inc. could feel the heat.
The action comes amid signs of reduced demand at computer chip manufacturers, which some analysts say means PC sales are growing more slowly than a year ago.
Compaq, however, said the trouble is it cannot meet an internal target for 35 percent sales growth at the current pricing level. That sales target is sharply above the 15 percent to 20 percent growth analysts have forecast for the overall PC industry this year.
``We just need to jump-start the business and get back to our plan, and to do that it's going to cause some margin degradation,'' White said. ``We still think we're growing faster than the market. We still think the market is strong.''
LENGTH: Medium: 70 lines ILLUSTRATION: GRAPHIC: Chart by AP: Cutting pc prices.by CNB