IBM, Dell slip as Prudential lowers revenue targets

IBM shares were down $1.87 to $82.80 in early trading, but rose to $84.38, just shy of their opening price, later in the morning. Dell was down 63 cents, or more than 3 percent, to $17.38 by midmorning.

In a research note, Prudential analyst Kimberly Alexy cut IBM's fourth-quarter revenue estimates from $25.3 billion to $24.4 billion because of weakness in the company's PC, hard drive and software businesses.

Alexy also cut her already lowered revenue targets for PC maker Dell on Thursday. She shaved Dell's fourth-quarter revenue estimates to $8.29 billion from $8.38 billion. Earnings estimates were cut to 23 cents a share from 26 cents a share.

A big part of Alexy's concern about IBM revolved around the sluggish PC market. In her research note, she said IBM's PC business will "likely be closer to flat" sequentially, compared to her original estimate calling for 13 percent growth. Alexy is forecasting PC system sales of $4.28 billion, down from an original estimate of $4.84 billion. Notebook sales are expected to be especially hard hit, she said.

Alexy, who rates IBM a "hold," said the tech giant is likely to hit her earnings targets, which are 7 cents below First Call consensus estimates of $1.46 a share. "We believe IBM has sufficient control over discretionary expenses to offset a potential revenue shortfall," she said.

With the estimate change, Alexy becomes the latest analyst to opine on IBM's fourth-quarter results, which will be announced Jan. 17. On Dec. 22, Salomon Smith Barney analyst John B. Jones Jr. said it was time for investors to "back up the truck" and buy IBM. He reiterated his "buy" rating and $130 price target. On Dec. 20, Merrill Lynch downgraded IBM to "neutral," citing macroeconomic concerns.

The slowing PC sector has inspired a host of downgrades for Dell, Hewlett-Packard and others. But IBM's worries go beyond the PC sector, said the Prudential analyst.

Alexy said IBM's software business "has failed to snap back" because of sluggish performance from the company's Tivoli unit. In addition, IBM could be hit by price wars in its high-end drive business and a slowdown in mainframe systems.

The big issue for Alexy is whether IBM can maintain earnings growth as sales slip. "While IBM has increased (earnings per share) mid-teens for the past two years, we question the long-term sustainability of this level of growth if revenue growth decelerates to mid-single digit levels," she said.

"We believe the trading range on IBM shares is approximately $85 to $110," Alexy said.