IBM suffers downgrading

It's not Big Blue's fault. A strong dollar and weak European economies have led analysts to rein in their earnings estimates.

CNET News staff
3 min read
IBM (IBM) was slapped around today for economic conditions beyond its control.

Big Blue's earning estimates were cut by at least three analysts, who cited a strong dollar abroad.

"The increase in the value of the dollar in the past month or so has led us to sharply revise our estimate of the adverse effect that currency translation will have on IBM's revenues and profits," said Dan Mandresh, a Merrill Lynch analyst, in a report.

Key currency concerns include the dollar's position against the yen and the Deutsche mark. While local growth in the Asia-Pacific region remains strong, IBM reported dollar revenues that were negatively affected by 8 to 19 points last year due to weak currency there. Mandresh explained that conditions are not expected to improve.

Mandresh cut his first-quarter estimate for IBM's earnings per share to $2.32 from $2.56. He also reduced his estimate for IBM's 1997 earnings per share to $12.50 from $13, but kept his ratings for the company at "near" and "long-term buy."

The company's stock remained steady during trading despite the downgrades. It traded as low as 143 a share this morning, down from yesterday's close of 145-1/4. The stock, however, regained most of the losses in afternoon trading.

Salomon Brothers analyst John Jones reduced his 1997 earnings-per-share estimates for IBM to $12.50 from $12.90. In addition, Jones cut his 1998 estimate to $14.50 from $15.

He also attributes his cuts to the stronger dollar.

"Over the past 45 days, the U.S. dollar has been much stronger vis-a-vis the G7 [Group of Seven industrialized nations] currencies than our original forecast for 1997," said Jones in a report. "We currently foresee a negative impact of eight to nine percent on every dollar of international revenue."

Morgan Stanley analyst Steven Milunovich also cut his first-quarter earnings-per-share estimate for IBM to $2.30 from $2.38, citing the impact of the strong dollar. And although he cut his 1997 estimate to $12.50 from $12.55, he maintained his "outperform" rating on the stock.

IBM does not face the issue of the strong dollar alone. Economic conditions overseas are playing a role in the financial conditions of many companies with some of their business abroad.

The German PC market, the third-largest in the world, was stung in the fourth quarter of 1996 by the continued pressure of record unemployment levels.

"Unemployment is very high, there is a lot of anxiety, and consumer confidence is low," said IDC analyst Kevin Hause in an earlier interview.

Germany is a growth engine for Europe, and it has been struggling to bring the economies of East and West Germany together.

In addition to a strong dollar overseas, there has also been a shift away from what has traditionally been one of the strongest markets in both software sales and growth, according to the Software Publishers Association. Lately, the biggest growth in sales has been in Japan and Brazil.

In other news, IBM appointed Richmond Lo as general manager for IBM Greater China Group, which is based in Hong Kong. Lo will oversee IBM's personal computer business in China, Hong Kong, and Taiwan.