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Captainless Compaq Still in Rough Waters, and Shareholders Are Seasick

Unlikely to earn a cent in profit this year, the PC maker gropes for solutions.

Compaq

(CPQ)

, the world's largest computer maker, is unlikely to earn a cent in

profit this year. Caught between excess inventory and continued pressure from direct sellers, what Compaq desperately needs is a chief executive to pull the company out of its current malaise.

For the second consecutive quarter, the Houston-based PC maker warned Wall Street that it would miss analysts' earnings expectations by a wide margin. Compaq forecast a second-quarter loss of up to 15 cents a share; consensus expectations had Compaq earning 20 cents a share. Despite the bad news, the stock edged 1/4 higher to 22 1/2 at the close Thursday.

Perhaps investors are willing to cede chairman and acting CEO Ben Rosen some breathing room as he cleans up the mess left behind by previous management.

On the other hand, Rosen's substantial reorganization plan announced Thursday may just be a repeat of last year's mishaps. Then, faced with the threat of sub-$1,000 PCs, Compaq flooded the retail market and cut prices to clear out 11 weeks of inventory. This escalated a price war as PC makers fought to maintain market share.

IBM

(IBM) - Get International Business Machines (IBM) Report

alone lost $1 billion last year playing this game.

This year Compaq's inventory channel is around 5 1/2 weeks, estimates

International Data

analyst Amir Ahari, not as bad as last year's but still well above the four-week level the company claims.

"A lot of the crap that happened during Compaq CFO Earl Mason's time is filtering through to the customer, and those customers are deciding to side with Dell and IBM," says International Data's Amir Ahari.

Compaq's other problem stems from its failure in the direct sales model. Compaq is caught in a bind: Although the company announced plans Thursday to ramp up its direct sales to 25% of total revenue by the end of the year, this will hurt its relationship with its resellers.

The direct sellers,

Dell

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and

Gateway

(GTW)

, have been gaining from Compaq's missteps. International Data reported that Dell had 20% of the small-business market in the first quarter, up from around 15% in the fourth quarter of last year.

Compaq Needs an Executioner

Rosen's recent radical moves seem to be part of plan to undo much of the vision created by ex-CEO Eckhard Pfeiffer. Pfeiffer wanted to grow through acquisitions. He snapped up two struggling companies,

Tandem

and

Digital Equipment

, to move beyond the PC. As the acquisitions failed to generate momentum, CFO Earl Mason hid the company's poor operational performance through an accounting maneuver called contra-revenue -- payments to resellers that are recorded against gross revenue. (

TSC

wrote about Compaq's contra-revenue

last month.)

"A lot of the crap that happened during Mason's time is filtering through to the customer, and those customers are deciding to side with Dell and IBM," says Ahari, who talked recently with a number of long-time Compaq customers not pleased with Compaq's muddled message. "I could see the froth at the sides of

these customer's mouths."

How can Compaq right itself? Start at the top. Analysts say it should hire visionaries as division heads, but not for the top post. "Compaq needs to fill its CEO role with an executioner like Michael Dell, someone who can present the Street with consistent financial results," says

US Bancorp Piper Jaffray's

Ashok Kumar.