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IBM surges on 2001 outlook, analyst confidence

The computer maker's shares surge as investors cheer a solid fourth-quarter report devoid of any nasty surprises, but a few analysts remain cautious.

4 min read
IBM shares surged Thursday as investors cheered a solid fourth-quarter report devoid of any nasty surprises, but a few analysts remained cautious on concerns about weaker information technology spending.

Shares were up $11.31, or 11.7 percent, to $108 in midday trading.

In its fourth quarter, IBM pocketed $2.7 billion, or $1.48 a share, compared with $2.1 billion, or $1.12 a share, a year earlier. Analysts polled by First Call had expected earnings per share of $1.46. Revenue was $25.6 billion, up from $24.2 billion a year ago.

IBM impressed Wall Street with its outlook. Big Blue said it was comfortable with 2001 earnings and sales targets. For 2001, IBM is expected to report earnings of $4.99 a share on sales of $95.6 billion, according to First Call.

In many respects, IBM's fourth quarter was a replay of previous quarters. But IBM's steady-as-she-goes growth was viewed as a positive, relative to tech peers that have issued profit warnings.

IBM continued to grow at a single-digit pace, rely on services, and boost its bottom line with share repurchases. IBM repurchased $1.4 billion of its stock in the fourth quarter. For 2000, IBM spent $6.7 billion in share repurchase, on par with what IBM has spent for the last three years.

Slowdown, what slowdown?
Most analysts were surprised IBM managed to shake off an economic slowdown. Ahead of IBM's report, many analysts lowered estimates in anticipation of slower IT spending.

Bear Stearns analyst Andrew J. Neff, who maintained a "buy" rating and target price of $150 to $160 a share, said the quarter was a "real upside surprise from expectations."

Neff added that with several business lines likely to pick up momentum in 2001, the time to own IBM is now, while it sells at a "below-market multiple."

He noted that the company's fourth-quarter performance and guidance for 2001 "was some what at odds with that seen at some other large companies." Hewlett-Packard is seeing deceleration in its corporate business, and Cisco Systems has made cautious comments about enterprise spending.

Neff said the stock should do well as long as IBM's operations remain steady and investors view the company as a safe place to park their money. Those factors "should carry into mid-2001," he said.

UBS Warburg analyst Don Young reiterated his "strong buy" rating on the stock and noted that a good performance from IBM's mainframe division is "not a one-quarter scenario." IBM has visibility through April for mainframe demand, indicating a good backlog.

Wasserstein Perella analyst Stephen C. Dube continued to rate the stock a "buy," with a $130 price target. Dube raised his 2001 earnings estimate from $4.95 per share to $5, where it was before the third-quarter problems surfaced. "The problems of 2000 are history," Dube wrote. "IBM stock should now have clear sailing."

Not so fast
Other analysts questioned the company's ability to defy the slowdown and meet its 2001 targets if the weakness should continue. In a conference call, CFO John Joyce implied that visibility was still a bit muddled. "From what we know today and our fourth-quarter results, we are comfortable with consensus estimates for 2001," Joyce said.

Merrill Lynch analyst Thomas Kraemer said IBM had a good quarter, but he continued to rate the stock "neutral" with a "long-term buy" rating. He questioned Big Blue's ability to meet revenue estimates.

"Although the results were solid and we expect the stock to respond favorably in the near term, we continue to rate the share neutral due to long-term concerns over IBM's server businesses and overall IT spending," said Kraemer.

According to a Merrill survey, server and IT spending could weaken throughout the year. If that trend continues, Kraemer thinks the company won't be able to meet its revenue expectations. But Kraemer did not change his fiscal 2001 estimates for revenue of $93 billion and earnings of $4.87 cents a share.

Prudential Securities analyst Kimberly Alexy also remained cautious on the 2001 growth outlook, maintaining a "hold" rating.

"We remain skeptical about the sustainability of strong server and PC sales, which we believe have weakened in recent weeks," the analyst wrote in a research note. She believes server and PC sales will weaken in the first half and that even strength in Europe and Asia won't offset the slump.

Alexy said the company's full-year revenue growth guidance of upper single-digit levels is overly aggressive. She is predicting 5 percent growth.

"While we expect the shares to trade up today, we believe they have reached the upper end of the range and further multiple expansion from current levels is unlikely," Alexy added.

Diversification pays
Though analysts disagreed on IBM's outlook, they were unanimous in their praise of IBM's diversified portfolio of businesses.

"IBM's attractiveness is based upon a diversified and predictable profit stream from the services, software, and financing segments with reduced exposure to the volatile hardware business," Young said in a research note. In a report, "The Tortoise Beats the Hare?" Credit Suisse First Boston analyst Kevin McCarthy, who maintained a "hold" rating, praised the company's diversification but suggested IBM will have to spinout individual businesses eventually.