Curtain Lifts at H-P, Compaq on Second Act for High-Profile Chiefs

When Compaq (CPQ Quote) CEO Michael Capellas and Hewlett-Packard (HWP Quote) CEO Carly Fiorina began their tenures the same week six months ago, much was expected of them.

One was the most powerful female executive in America, a 21st-century marketing maestro with her own jet. The other was a behind-the-scenes tinkerer who was Compaq's COO for nine months and was therefore already acclimated to the high standards set by Chairman Ben Rosen.

Now, six months later, the execs and their companies are approaching a critical juncture -- and not just because rumors persist that H-P is going to acquire Compaq. (Both companies scoff at the notion.) Recent action in the companies' shares suggests Fiorina and Capellas are receiving an awful lot of goodwill from the Street. Now analysts and shareholders are saying these 45-year-olds will have to put on one heck of a show to keep shareholders from growing restive.

Running Numbers

Fiorina, with the help of CFO Bob Wayman, needs to post a string of strong financial numbers after she guaranteed 12% to 15% top- and bottom-line growth for the fiscal year ending in October. Although Capellas has set Compaq's sights a bit lower -- 10% to 12% revenue growth this year -- analysts still see a number of stumbling blocks in his way.

Although the company's earnings weakness last year -- a 49% drop from 1998 -- has given Capellas room to articulate a clear vision, he has yet to do so. Capellas' biggest hurdle is to reignite the company's commercial sales arm, which had operating losses of $448 million last year. Capellas sees 12% to 15% revenue growth this year for the unit, which made up 30% of the company's revenue at the end of 1999. Some analysts say Capellas has yet to show them exactly how he intends to get there.

"There is enormous earnings power, brand equity and potential, but Compaq also has an unproven management team in a highly competitive environment without a clear vision," says Andy Neff, an analyst at Bear Stearns who rates Compaq an attractive, the firm's second-highest rating after buy. His firm has done no underwriting for the company.

Another was more blunt. "I just don't see how the hell Compaq is going to hit 12% revenue growth," said the analyst at a money-management team, requesting anonymity. His firm is long Compaq.

Six Months Later, How Do They Stack Up?

H-P CEO Carly Fiorina Compaq CEO Michael Capellas AGE 45 45 LENGTH OF TENURE CEO - 6 months CEO - 6 months COO - August 1998 to July 1999 STOCK RETURN -7% 9% ACCOMPLISHMENTS Raised H-P's profile and streamlined everything from the company's work force to its name. Introduced new line of PC called iPaq and has convinced the Street to remain patient. GOALS FOR 2000 Fiorina tells Street to expect earnings and revenue growth between 12% and 15% this fiscal year. 10%-12% revenue growth for 2000, and finding a way to reinvigorate commercial PC and enterprise sales. Hire a CFO.

Living in the Past

For H-P, the problem lies not with Fiorina but with the company's repeated failure to live up to past earnings expectations. For the last two fiscal years, the company has promised analysts a strong second half in terms of revenue and has failed to deliver both times.

"A miss this year could really ruin much of the momentum Fiorina has built up so far," says Lenny Schuster, a money manager with Gemina Partners, which is long H-P. H-P is scheduled to report first-quarter earnings Feb. 16, and analyst consensus estimates call for earnings of 78 cents a share, below last year's first-quarter result of 85 cents a share. Revenue estimates are for $11.4 billion, up 11% from a year ago.

While many credit Fiorina with H-P's recent turnaround, the company's recent run has more to do with the spinoff of its Agilent Technologies (A Quote) unit than anything else. H-P shareholders will soon receive shares of this test and measurement company, whose stock has more than doubled since its IPO last November. H-P is in a quiet period, making Fiorina unavailable for comment.

Now that investors have better visibility on both companies, Fiorina and Capellas are plotting to ensure their second act has the substance their first lacked. Investors -- especially H-P shareholders who have seen their stock zig-zag wildly over the last six months -- may want to watch future quarterly earnings results closely.