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May 3, 1994


By CBR Staff Writer

When the function of a Wall Street stock analyst is seen to be to give the firm’s sales force a story on which to sell shares rather than to be right about the fundamentals of a company, it is often a drawback to be too bright and rigorously analytical. Stephen Smith at PaineWebber Inc has for some time been a confirmed bear of IBM Corp, believing that superficial improvements mask still deep underlying weaknesses that still haven’t been addressed. That doesn’t do him much good when he puts out a bearish note and the wishful thinkers pay no notice and drive the share price up. At Computergram, we don’t have to worry too much about which way the investing herd is jumping, so when Smith says that Digital Equipment Corp shares are now so bombed out that the company is a glaring bid candidate, we sit up and listen. He has upgraded DEC to a buy from a neutral, saying it is vastly undervalued and at this price – the market capitalisation is a derisory $2,500m and there must be people out there that reckon they could take more costs out of the business than incumbent management has done. Either their stock goes up or they are (an acquisition target), Smith said. This is a $13 billion company selling at a market cap less than Silicon Graphics Inc. He points out that the parts of DEC are separately worth more than its current price and that the cash flow from the company’s services business alone is higher than its current stock price – the personal computer company and the disk drive company are each billion dollar-a-year businesses.

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