Compaq Capers, and Why a Turnaround at Apple May Be for Real

Also, more on Lernout.
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Monday Massacre:

An unkind word for Compaq -- yep kick 'em when they're down:

The only reaction I had to yesterday's surprise

resignations of CEO Eckhard Pfeiffer and CFO Earl Mason was what took

Compaq

(CPQ)

so long to dump them?

A little longer than a year ago, the company got in trouble for stuffing the channel with way too much merchandise. But, lo and behold, as this column

reported last week, one very good source suggested the company was up to its old tricks during the last week of last quarter by offering extremely attractive incentives to get distributors to take extra product. (Otherwise known as stuffing.)

Compaq clearly got caught flat-footed by the industry's swift move to direct-to-customer sales, having built an IBM-like structure (with the back-to-back acquisitions of

Tandem

and

Digital Equipment

) at precisely the wrong time. "They created a high-cost company in a world that was moving so fast it would make your head spin," says hedge fund manager Jeff Matthews of

RamPartners

in Greenwich, Conn.

What's more, Pfeiffer and Mason were arrogant. More than one money manager has described how, prior to the year-ago blowup, Mason would say one thing at one conference one week, something else at another the next week and then issue a press release full of disappointments a few weeks later. Matthews, whose calls on Compaq over the past year have been right on, said he was surprised when he heard Compaq was stuffing last quarter "because they had already been so burned by it."

Perhaps, but desperate people do desperate things, and usually acts of desperation in business don't work.

Now, a kind word about Apple:

Given the aforementioned turmoil at Compaq, it might be foolish to find kind words for anyone in the PC world. But it's when the emotions of headlines are fiercest that taking a clear-headed look away from the fray makes some sense. I heard from one of my regular (albeit press-shy when it comes to using his name) money managers regarding

Apple

(AAPL) - Get Report

.

This is the same money manager who not long ago gave readers a head's up on the rebound at

Qualcomm

(QCOM) - Get Report

, and not that long ago he was prescient in his reasons for loving the then-dejected

GM

(GM) - Get Report

,

Ford

(F) - Get Report

and

Chrysler

now

Daimler Chrysler

(

(DCX)

.

"Yeah, I may have lost my mind on this, but I am really beginning to believe this company is misunderstood and underappreciated," he says. "First, the recent improvement at the company is very real. Cash Flow from operations has been gigantic for the last seven quarters. As of the numbers announced last week, Apple has $2.92 billion of cash on the balance sheet. They announced that they are calling their $660 million convertible issue in on June 1.

"When you eliminate the convertible debt and adjust for the new shares, Apple will have over $2.6 billion of net cash on the balance sheet, which is $15.20 a share -- NET. That is 42% of the stock price. Operationally, gross margins have been trending up for the past five quarters, and were just shy of 26% in the March quarter. Remember that Apple has a cost advantage of over $100 a box over the Wintel contingent because they don't pay

Intel

(INTC) - Get Report

for their expensive processors and they don't pay

Microsoft

(MSFT) - Get Report

.

"Although I would not buy an

iMac

, the fact is they are among the best selling boxes in the computer world. Our contacts continue to tell us that their order rates form Apple are strong and, believe it or not, improving. There are not too many PC companies that I can say that about. They have new products that they will be introducing over the late spring and summer which could boost the iMac business.

"A number if things are surprising about the company's resurgence, but perhaps most surprising is who is buying it -- they claim 13% of buyers are Wintel converts and a large percentage are first time computer buyers. One thing that grabbed me was their claim that the iMac has taken 19% of the Japanese desktop market.

"What's more, investor psychology is generally very negative. Not many believe that the recovery at this company is for real. (You may recall that not many believed

Qualcomm

(QCOM) - Get Report

either.)" This is the same guy who tipped off readers of this column to

that

company's turnaround. "Earnings," he continues, "are estimated to be $2.70 for the fiscal year ending in September. Their tax rate is very low, so the real fully taxed number would be more like $2.10 or so.

"One of the things that I keep thinking about is the fact that Apple doesn't have much of an enterprise business. This suggests to me that they have less Y2K push-out risk than other hardware companies have, and that could be the reason that suppliers are telling us that orders from Apple are accelerating.

"The net of all this is that I could see perception of Apple changing dramatically over the next six months or so. In a world of vast uncertainty in the PC space, Apple should be one of the few companies to grow."

He may have something there. My 14-year-old needs a new computer, and she'd really like a blue iMac! It's the way she says, "They're so Cuuuute! Just like a Beetle." And look at the resurgence at

VW

. (Yep, you know what car is destined for my garage one day!)

More on Lernout:

Still haven't heard from anybody at

Lernout

(LHSP)

regarding questions posed by this column. But I did hear from Microsoft after the publication of Friday's column. The column in question wondered how soon Microsoft would sell its Lernout shares after in the wake of the Belgian speech recognition company's filing of a registration statement on Microsoft's behalf. The filing gives Microsoft the right to sell its Lernout stock at any time. Microsoft wasn't responding to the item; its representative was returning a call placed prior to the column's publication. (Drats that three-hour time difference!) She said it's standard practice for Microsoft to file a registration statement, and that it's no indication of a change in Microsoft's relationship with Lernout "at the present time."

So, why, you might ask, didn't Microsoft file the registration statement when it originally bought most of its Lernout shares back in 1997? Wouldn't we all like to know!

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.