IBM Stock Rises on Analyst Kudos

While other technology stocks fell Thursday, IBM (NYSE: IBM) shares rose as Big Blue's strategy to abandon the hard disk drive market drew kudos from analysts and the company announced plans to restate its financials.

Other hardware stocks took a dive, but IBM shares edged up 95 cents on the New York Stock Exchange to US$75.60.

The boost came after Steve Weber, an analyst with SG Cowen, boosted his 2002 forecast for the technology giant, saying that earnings per share should come in at $4.55 rather than the $4.40 he previously estimated. Weber added that he expects earnings per share for 2003 to check in at $5.40 instead of $5.30.

In addition, UBS Warburg analyst Don Young reiterated his strong buy rating on IBM. In a report, Young said that by exiting the hard disk drive arena, IBM will shed what has been a thorn in its financial side.

Earlier this year, the company "trimmed non-performing divisions like hard disk drives," offloading 17,000 employees to a joint venture with Hitachi.

Rough First Quarter

While IBM benefited from some analysts' approval, it drew skepticism from others, such as Toni Sacconaghi of Sanford Bernstein, who lowered 2002 forecasts for the company, saying technology spending remains down. Sacconaghi forecast IBM earnings of $4 per share, down from earlier predictions of $4.20 per share.

IBM had a rough first quarter. Diluted earnings per share fell 31 percent from the year-ago period to 68 cents. Net income in the first quarter was $1.19 billion, a 32 percent decline from the $1.75 billion recorded in the same quarter in 2001.

At the time, IBM president and CEO Samuel J. Palmisano called the first-quarter results "disappointing" and blamed them in large part on the "continued weak global business environment."

"Customers in every part of the world deferred technology purchases in the first quarter, and these widespread deferrals hurt us across every one of our major business segments," Palmisano explained.

Setback for Recovery

Yankee Group analyst Harry Tse told the E-Commerce Times that while the lower earnings and losses were not devastating for IBM, they represented a setback for a near-term tech recovery.

"It's not that bad [for IBM], but it's not a good indicator of where the industry is heading," Tse noted. "The recovery may not be in sight as many people had hoped."

Palmisano has said that IBM remains "optimistic that business conditions will improve later this year" and has pointed to IBM's success in garnering income.

"Even within this tough climate, we generated $1.7 billion in pretax income, we had very strong services signings of more than $15 billion, and we believe we gained or held share in high-priority segments of services, software, servers and advanced storage products," he noted.

Layoffs Expected

Still, Tse said that IBM had to do something to meet its forecasts, and the company has obliged with a series of layoffs expected to affect between 8 and 9 percent of its workforce. The company reportedly will take a charge of up to $2.5 billion in connection with the layoffs and the dumping of its hard drive unit.

IBM also will restate previous quarters' results without including its hard disk drive business.

Warburg's Young said he approves of the accounting move, but Sacconaghi directed investors to track IBM's revenue instead, because doing so would present a truer picture of the company's financial health.

According to published reports, SG Cowen's Weber holds a position in IBM, and Warburg analysts own IBM securities.