Is Big Blue soon going to be singing the blues?
Shares of IBM fell 2.87 to 108.12 in early afternoon trading today, after the second influential analyst in less than a week cut earnings estimates on the company due to growing concerns about the Asian economy.
The analyst, Laura Conigliaro of Goldman Sachs, reduced her earnings forecast from $1.58 per share to $1.50 for the second quarter, and from $1.62 to $1.55 for the third quarter.
For all of 1998, Conigliaro estimated IBM would post profits of just $6.55 per share, down from her previous estimate of $6.70, and $7.55 in 1999, down from $7.65. She downgraded the stock, removing it from Goldman's "global priority" list but leaving it on the firm's "recommended" list.
Asia's troubles are affecting other computer vendors in addition to IBM. Conigliaro lowered her earnings forecast for Hewlett-Packard's quarter ending in October by 5 cents per share, to 86 cents per share. She also cut Sun Microsystems' estimated 1999 earnings by 3 cents, to $2.70 per share, and drastically slashed her estimates on Stratus Computer, predicting that the Marlboro, Massachusetts-based computer company will post 1998 earnings of just 50 cents per share, down from $3.10 per share. She lowered her 1999 earnings estimate on the company to $2.00 per share from $3.65 per share.
"We have grown increasingly concerned about the worsening situation in Asia and the weakened yen," Conigliaro wrote in a report. "As with other indirect PC companies, IBM continues to wrestle with the dual whammy of constrained shipments into the channel plus ongoing price cuts to help move volumes already in the channel."
The report comes two days after Merrill Lynch analyst Steven Milunovich cut his second-quarter and full-year earnings estimates for IBM, citing Asian economic woes and sagging product sales. He maintained his "buy" rating on the stock, however.
Other analysts agreed that Asia presents a near-term challenge for IBM--a bellwether among tech stocks--but most of them remained bullish nevertheless.
The drop in shares of IBM marks the company's continued retreat from its 52-week high of 129.31 on May 14--a day after chief executive Lou Gerstner discussed the company's long-term strategy with Wall Street analysts. Just last March, IBM was trading as low as 95.
Still, like the other analysts, both Conigliaro and Milunovich remain bullish on IBM for the long term.
"Over a more intermediate and longer term, we remain quite positive," Conigliaro's report stated. "Apart from IBM's defensive characteristics, we continue to believe in IBM's ability to gradually improve its top-line growth prospects which, in turn, should keep [earnings-per-share] growth in a 13 percent- to 15 percent-type range."
Echoing those comments, Milunovich wrote: "We still view IBM as an excellent long-term holding. CIOs tell us that services spending will remain strong and that IBM is one of the few true solutions vendors."
Milunovich cut his second-quarter estimates on IBM to $1.45 per share from $1.52 per share, and cut his full-year estimates to $6.35 from $6.45.
Other analysts cautioned against reading too much into the negative comments--at least for now. Despite the two reports, a consensus of analysts still expects Big Blue to report second-quarter earnings of $1.50 a share and fiscal 1998 earnings of $6.50, according to First Call.
"Most of the changes [in earnings' estimates] that have taken place so far have been to move to the mean, so it's been pretty much a fine tuning [of the estimates]," said Chuck Hill, a First Call spokesman.
In cutting their reports on IBM, both Conigliaro and Milunovich cited the worsening economy in Asia, particularly in Japan. Nonetheless, they said, business elsewhere remains good for Big Blue.
Other analysts agreed.
"In the short term, nothing has changed for IBM other than the Asia situation has gotten reasonably worse in the recent weeks," said Stephen Dube, an analyst with Wasserstein Perella. "Korea, Malaysia, and Indonesia are still doing considerably poor, and [those regions] represent a significant portion of their business."
Dube added that IBM continues to be under pressure in its PC business, but said his current quarterly estimate of 1.50 a share remains unchanged for now.
The revised forecasts are in contrast to the comments Gerstner made at the analysts' meeting in May, when he said the company's computer services division could lift IBM's overall growth into the double digits.