Big Blue's warning hits mainframe software stocks

Jan. 2, 2002 4:43 p.m. PT

2 min read

IBM Corp. (NYSE: IBM) plunged 16 percent Thursday on its Year 2000 warning and dragged down mainframe software companies with it. Computer Associates, Compuware and BMC Software all took hits.

Analysts' prognoses for IBM was grim. IBM was downgraded to "neutral" from "buy" by Merrill Lynch analyst Steven Milunovich after it met third quarter estimates of 90 cents a share, but reported disappointing 5 percent revenue growth.

IBM said Y2K would result in a sharp earnings decline for the first and fourth quarters. The fact that IBM didn't suggest it could make up the shortfall was seen as even greater reason to be bearish, said analysts.

Morgan Stanley cut its rating on IBM to "neutral" from "outperform" and slashed its earnings estimates for the full 1999 year to $3.54 per share from $4.01 per share.

IBM's woes had a big ripple effect. Computer Associates International Inc (NYSE: CA) dropped 4 3/4 to 53 1/2, or 8 percent, Compuware Corp. (Nasdaq: CPWR) fell 3 7/6 to 27 1/16, or 11 percent and BMC Software (Nasdaq: BMCS) dropped 8 1/16 to 52 1/8, or 13 percent.

Big Blue said that mainframe processing power declined significantly - the number of MIPs shipped in the September quarter dropped 18 percent from year ago levels, due to client concerns approaching Y2K.

But some analysts said the mainframe software stock reaction was overblown. Given mainframe hardware pricing (which plummeted) and mainframe software pricing (which has held steady), IBM's drop should have no immediate impact on Computer Associates, BMC or Compuware, said Credit Suisse First Boston analyst Wendell H. Laidley.

"Considering the improving demand-side environment and strong fundamentals, we would regard any weakness in Computer Associates, BMC or Compuware shares as a buying opportunity," Laidley said. He had a "buy" rating on all three stocks.

ABN AMRO reiterated a "buy" rating on Computer Associates Wednesday after it reported strong second quarter earnings.

Banc of America Securities said Thursday it cut its rating on business software company BMC Software to "market performer" from "buy" details were not immediately available.