Michael Capellas isn't one of the most compelling narrators the world has ever known. But when

Compaq

(CPQ)

reports its second-quarter earnings Tuesday after the market closes, its supporters are hoping to get the latest chapter from CEO Capellas in what they like to think of as a long, slow turnaround story of this beleaguered boxmaker.

Analysts polled by

First Call/Thomson Financial

expect the company to earn 21 cents a share, compared with a year-ago loss of 10 cents.

The brightest spot of that reversal is likely to come from the company's commercial PC business, which Compaq has long been trying to revive, progressively narrowing its losses in that segment over the last few quarters.

In addition, Compaq is being aided by Capellas' cost-cutting measures and a tight supply of components. Generic "white-box" PC manufacturers are usually hit hardest by component shortages because they lack the preferred-customer status with suppliers that major companies like Compaq enjoy. By effectively taking second-tier players out of the market, parts shortages can give major PC venders some pricing leverage.

But costs can only be reduced so far, and component prices will tend to drop over time. Thus, according to

Gerard Klauer Mattison

analyst Dave Bailey, even more important than profitability is revenue growth. "They have relatively easy comparisons this and next quarter," says Bailey, who rates Compaq a hold and whose firm hasn't performed underwriting for Compaq. "So it's important to show growth."

The Big Picture

Growth in the commercial business is also important because of the anticipated weakness in the company's sales of low-end PCs to consumers. Poor results from low-end PC maker

eMachines

(EEEE)

and charges of rising

channel inventories have put Compaq shares under pressure in recent weeks. And Monday, investors' fears about Compaq were stoked by new quarterly figures from

Dataquest

and

International Data

, which showed unit shipments of PCs slowing considerably from last year, when price wars and free-PC programs boosted sales to what now seems to have been an unsustainable level.

Dataquest said that, year over year, U.S. sales grew 12% in the second quarter, while worldwide sales grew 18%. IDC showed U.S. and worldwide sales growing at 7% and 15%, respectively. Noting that unit-shipment growth for the "Fab Four" -- Compaq,

Dell

(DELL) - Get Report

,

Hewlett-Packard

(HWP)

and

IBM

(IBM) - Get Report

-- slipped to 12.6% in June,

UBS Warburg

analyst Charlie Wolf wrote: "Our Fab Four theme could possibly be in its twilight years." (Wolf's firm has no recent underwriting relationship with Compaq.)

Compaq sank 13/16 to 25 15/16 Monday in the wake of the Dataquest and IDC figures.

Under Pressure
Investors are looking for total confidence in Compaq's outlook for the second half.

Both the company's boosters and its skeptics agree that the most important thing about Tuesday's conference call is what the company will have to say about its prospects in the year's second half. The market largely has already understood the second quarter to be a lackluster period. Now, with the possibility of a sooner-than-expected slowdown in PC sales looming, investors don't want to hear Compaq exude anything but total confidence that sales will start accelerating as customers start adopting

Windows 2000

in greater numbers. Boxmakers hope that that the bulkier operating system will drive corporate customers to upgrade to more-powerful PCs.

Unix

Analysts will also be paying close attention to Compaq's Unix server business. The company finally started selling its high-end

Wildfire

servers in the second quarter, marking the first time its

Alpha

server line has been updated since it got the products in its 1998 acquisition of

Digital Equipment

. Now, with

Sun Microsystems

(SUNW) - Get Report

having reported a blowout quarter last week, investors want to see Compaq start building momentum in the fast-growing and highly profitable Unix segment.

Analysts expect Unix server sales to pick up and build momentum in the year's second half, if only because of pent-up demand from Compaq customers who want to upgrade their existing Alpha systems. But key to the company's success in the Unix segment is its ability to sell Wildfire into new accounts. "Sun reported outrageously good numbers last week, which shows that they're gaining market share," says Bailey at Gerard Klauer. "Can Compaq, in the long run, even approach that? They don't need to do what Sun is doing, but you can't just sell to your installed base."

Expanding the company's server base is important for reasons beyond short-term profit growth. Customers look at software availability when choosing server products, and independent software vendors prefer to develop products for dominant platforms. That virtuous cycle could start looking increasingly vicious to Compaq if it doesn't start picking up market share.

"Right now, Compaq looks like a distant fourth in the Unix market, behind Sun, H-P and IBM," says

PaineWebber

analyst Don Young, who gives the company a neutral rating. "I'd say that Compaq doesn't have much time here before they become irrelevant in the Unix space. And to me, that's a critical point. I tend to think it's already over. But management's top priority is to turn around the Alpha server business." (PaineWebber hasn't performed any recent underwriting for Compaq, Sun, H-P or IBM.)