IBM's stock takes a dive this morning, despite the company's stronger-than-expected earnings report, causing a sell-off of blue chip stocks.
The stock closed at $158 a share, down 10 points on the New York Stock Exchange from 168 at the close of the market yesterday.
The drop caused the Dow Industrials to weaken in early trading, as investors shied away of an anticipated IBM sell-off which would pound the blue chip index. The Dow was down at 6850.03, down 33.87 points from yesterday's close.
The drop may be a result of analyst rating cuts of IBM stock.
Morgan Stanley analyst Steve Milunovich said that he expects IBM's stock to see a price correction of "perhaps ten percent or more," but added that he would "buy aggressively" once it reaches that point. He also expects the company's first-quarter earnings per share would be weighed down by weak European results, lower DRAM prices, and a negative impact from exchanging overseas currencies into U.S. dollars.
Milunovich also cut his 1997 earnings estimate on IBM to $12.55 from $12.75 per share.
Other firms also altered their 1997 expectations for the company.
A Merrill Lynch analyst cut his 1997 earnings estimate to $13 a share from $13.40, but upheld 1998 earnings estimate of $15 a share. An analyst at Cowen & Company also reduced his earnings estimates to $12.40 from $13.25 for 1997, but maintained a strong buy rating.
But not all the news was bad. Gruntal & Company analyst David Takata said he is raising his price target to $200, which is about 15 times his 1997 earnings estimates. He also said he is maintaining his 1997 earnings estimates for IBM of $13.00 a share, and introducing an estimate of $14.09 for 1998. Takata said Gruntal believes IBM is capable of maintaining its position as the high-end server company.
PaineWebber analyst Stephen Smith said he raised his 1997 earnings estimate to $11.30 a share from $11.12 to reflect a lower tax rate in the year. However, Smith said he remains concerned about long-term growth prospects and expects IBM to generate less gross profits from mainframe computers in 1997.
Big Blue, which has seen its stock price soar since November from investors who viewed it as undervalued, did not get a further boost from shareholders after announcing its financial results.
Big Blue reported net profits of $2 billion, or $3.93 a share, for the period ending December 31, compared with net earnings of $1.7 billion, or $3.09 a share, a year earlier.
Wall Street had expected the company to post earnings of $3.88 a share, according to First Call.
The computer giant reported a 5.6 percent increase in quarterly revenues to $23.14 billion, up from $21.9 billion a year ago.
And for fiscal 1996 year, IBM reported net earnings of $5.9 billion, or $11.06 a share, compared with $6 billion, or $10.46 a share, a year earlier. Revenues climbed to $75.9 billion for the year, up 6 percent from the prior year.
"We showed good growth in the fourth quarter despite a difficult year-over-year comparison, continued weakness in Europe and greater than expected currency impact," said Louis Gerstner, chairman and chief executive, in a statement. "I'm especially pleased by the ongoing strong growth in our services business, by our improved software results--led by our Lotus and Tivoli units--and by the continued turnaround in our Personal Computer company. Our storage business also turned in an outstanding quarter and demand for our System/390 servers remained strong.
Hardware sales overall showed a slight two percent increase to $11.7 billion for the quarter. Big Blue's personal computer commercial and consumer sales and its AS/400, storage product and networking revenues grew over last year. But its System/390 and microelectronics revenues fell.
Despite System/390's revenue decline, fourth-quarter shipments increased 80 percent through all sales channels compared to the third quarter. And the average shipment rates increased more than twice the level in the first three quarters, said Richard Thoman, chief financial officer.
The company's RS/6000 had mixed results. The high-end servers experienced high growth, while the rest of the product line declined slightly, Thoman said.
Workstations also remained weak for the quarter, in part due to slow production on the newer models that began shipping in December and the transition to the 64-bit models, he said.
"They were mixed results, software and services were great," said David Takata, a Gruntal & Co. analyst.
He said weak mainframe computer revenues were disappointing. Some analysts had predicted better mainframe revenues in the quarter due to strong new products.
The sluggish mainframe sales and lower-than-expected restructuring costs lead a number of other analysts to call the quarter a disappointment after attending a meeting of IBM executives in New York.
Meanwhile, quarterly software sales grew 4 percent to $3.7 billion. IBM's acquisition of Lotus Notes posted a record 1.5 million units shipped during the quarter--bumping up the installed based to about 9 million users, double the number from a year ago.
But Big Blue's services operation posted the largest gain with a 22 percent gain to $5 billion, with the IBM Global Services signing up about $6 billion in new business.
And what about the outlook for the rest of the year?
"I feel good about 1997," said Richard Thoman, chief financial officer. "We face strong product demand for almost all our lines globally.
Issues that lie ahead for the computer maker are some of the same ones it faced in fiscal 1996.
Falling DRAM prices and a currency rate that carried a negative effect to IBM's bottom line will be issues that the computer maker will contend with in the coming year.
Reuters contributed to this report