Update: Merrill Cuts Forecast for Compaq, Maintains Rating - TheStreet

Update: Merrill Cuts Forecast for Compaq, Maintains Rating

Publish date:

(Updated from 9:22 a.m. ET)

Merrill Lynch

analyst Stephen Fortuna cut his estimates on



this morning. Fortuna, who was already forecasting earnings near the lower end of the consensus estimate, reduced his second-quarter and full-year projections for the computer maker based on "extensive channel checks as well as the weak demand environment for PCs and servers that persists in the U.S. and has increasingly spread into Europe."

Fortuna cut his revenue forecast for the current quarter to $8.315 billion, down 17.9% from the same period last year. He pointed out that his new projection is well below the average, as the previous consensus top line estimate was closer to $8.8 billion, with forecasts ranging from $8.5 billion to $9.3 billion.

The analyst also cut his earnings estimate for the quarter to 3 cents a share from 5 cents. The

Thomson Financial/First Call

consensus estimate is for earnings of 5 cents a share.

"While headcount reductions due to layoffs and attrition should lead to a leaner cost structure, we do not believe that this will positively impact margins enough for Compaq to overcome lower than expected sales and meet the current Q2 EPS consensus of $0.05," Fortuna wrote in a research note.

"While it is very likely that revenue will be especially weak this quarter, there is a slim possibility that EPS could meet the current consensus if several big contracts close before the quarter's end," he continued.

For the full fiscal year, Fortuna lowered his earnings estimate to 35 cents a share from 45 cents a share. Wall Street's consensus estimate is 52 cents. Attempts to reduce inventory in the face of weak demand will continue to pressure Compaq's revenue stream throughout the year, the analyst said, but he believes that the company's concentration on improving efficiency, rather than short-term sales gains, is the proper path to take.

Fortuna maintained his earnings estimate for next year at 65 cents a share. Fortuna still rates the stock an accumulate, with a $16 price tag. Compaq closed yesterday's trading session at $13.49.