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2HRS2GO: IBM watchers look to upbeat 2Q

Expect the expected when Big Blue reports earnings on Monday.

IBM stands for International Business Machines Corp. (NYSE: IBM), but it could just as easily be an acronym for Impressive Business Machine, which is what the company has turned into under the stewardship of chairman and CEO Lou Gerstner. Analysts expect to hear nothing different next week: First Call's survey of 21 analysts predicts a per-share profit of 88 cents, and most analysts expect sales somewhere above $20 billion; that's year-over-year growth of almost 13 percent on the earnings side and 6 to 10 percent on the revenue end, depending on which analyst you talk to.

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Don't count on IBM shattering forecasts the way it did in the first three months of this year, but the company normally comes in a penny or two ahead of estimates. "IBM is pretty reliable," says Daniel Kunstler, analyst with J.P. Morgan Securities. "I'm positive on the story."

The story hasn't really changed much. Hardware is essentially in a holding pattern, although longtime company watchers will be curious to see if the PC business continues its comeback (probably, particularly with Compaq's problems nowadays), and if the server business has emerged from its doldrums (not likely). Between Lotus, Tivoli and DB2 databases, software should be acceptably positive, if not strongly so. And of course, there's Gerstner's favorite topic nowadays, services, which will continue to lead IBM's growth. "The unit has a very good book this quarter," Kunstler says. "The services business really gives IBM a lot of cushion."

As with any technology company with a solid track record nowadays, Wall Street won't care much about the past quarter's result. Investors want to know what executives see in the second half of year, which is why Intel investors this week shrugged off the chip giant's second quarter earnings shortfall; the company predicted higher gross margins and strong growth along historical patterns, and Intel shares went up.

The same theory bit Apple, which reported stronger than expected quarterly results, but failed to answer questions about second half product rollouts. Apple expects gross margins to basically stay the same, but actually told analysts to lower their revenue expectations slightly for the third quarter, and refused to go into any detail about what might be driving fourth quarter strength. The result? Apple shares retreated after rising on high expectations prior to the earnings report.

Until this year, IBM executives always kept a cautious attitude about forecasts. Not anymore.

"Keep your eye on the enthusiasm and optimism expressed next week by Gerstner, regarding the second half," notes Ulric Weil, analyst with Friedman Billings Ramsey. "Lately, IBM hasn't been that low key. ... I think they realize that their stock isn't valued anywhere near an Internet stock."

IBM doesn't expect to be worth quite as much as a pure Internet play, like America Online, but because Big Blue gets a large portion of its business from the Internet -- Gerstner recently declared that 25 percent of IBM's business is Net-related -- the company deserves a higher price-to-earnings multiple than it currently carries, Weil says.

(At 136 and change, IBM doesn't appear undervalued to naive observers like me; rather, pure Internet stocks are overvalued. But faced with a choice between changing the attitudes of an entire stock market or shareholders of just one company, it's probably easier to work on the latter, even with a company as big as IBM)

So look for IBM to predict strong second half growth for its services unit. We'll hear lots about E-business, a decent amount about software, and a little bit about hardware (Just to be nitpicky: Get those AS/400 sales up!). Another typical report in the Gerstner era.

The hardest thing about handicapping next week might be the stock price itself, which could be why Weil -- who has a "buy" rating on IBM -- refuses to name a price target. "It's an embarassment," he says. "If you name a price, in a week people either have to sell, or you have to invent a reason why you're raising it again."

Other issues:

  • CNet Inc.
  • (Nasdaq: CNET) Investors have no reason to complain about how CEO Halsey Minor is running his business. The online provider of technology news and information can easily afford its new marketing campaign, which will only help build market share. And unlike other technology news providers or publishers (gee, I wonder who that could be?), Minor says CNet hasn't seen any evidence of a second half pullback in technology advertising in the face of Y2K problems; CNet has actually boosted its advertiser base from 85 to 99 merchants.

  • S3 Inc.
  • (Nasdaq: SIII) Wow, a profit. It's great news, but you have to wonder how much you can trust management's investor guidance, considering that just two weeks ago, the graphics chipset maker said it expected break-even results at best. Let's hope for continued profits, and better visibility.

    Looks like the market will close the week on a positive note. With two hours left in regular trading, the Nasdaq Composite Index was up 31.73 to 2,871.10, the S&P 500 up 7.80 to 1,417.42, and the Dow Jones Industrial Average higher by 20.27 to 11,206.68. 22GO>