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IBM drags down Wall Street

IBM's fourth-quarter shortfall, followed by its warning that the current quarter would fall short as well, rattles Wall Street, dragging the markets down.

When IBM (IBM) yesterday reported fourth-quarter earnings that missed analysts' expectations, and followed with a warning that the current quarter would fall short of last year's results, its words rattled Wall Street, dragging the markets down today.

The markets also responded to a number of analysts cutting their Big Blue ratings and earnings estimates.

In early trading, the Dow Jones industrial average was off nearly 110 points at 7763, following yesterday's 120-point gain. The Dow ended the day at 7794.4, down 78.72 points. The Nasdaq was down 10 points in the morning before finishing the day at 1587.95, down 2.19 points.

Big Blue's stock fell nearly 9 points, to as low as 99-5/8, on the New York Stock Exchange, before closing at 100-3/8, down 8 points.

IBM cited the Asian currency crisis, smaller margins resulting from the growth of its services business, the absorption of costs associated with the acquisition of Software Artistry, and its sponsorship of the Nagano Winter Olympics as factors contributing to the squeezing of the current quarter's profits. The company's earnings per share for the first quarter could end up roughly 10 cents to 15 cents lower than the previous year, the company predicted. (See related story)

Analysts responded this morning with changes in their recommendations and earnings estimates.

"We are getting more and more earnings reports, and getting a clearer picture of what's going to be the impact of Asia," said Arun Kumar, senior U.S. equities strategist at Lehman Brothers.

Lehman Brothers cut its rating on IBM shares to "neutral" from "outperform," while Donaldson Lufkin & Jenrette lowered its rating on the stock to "market perform" from "buy," a market source said today.

"In view of cautionary comments, we expect IBM's shares to retrace a significant portion of its recent gains," Lehman analyst George Elling said in a research note. "Accordingly, we now believe IBM's intermediate term stock price performance could be lackluster, and this has lowered our investment rating."

Merrill Lynch also reduced its 1998 earnings estimate on IBM, to $6.60 per share from $7.15 per share, and lowered its price target to $120 per share from $125 a share. The firm maintained its near-term "accumulate" and "long-term buy" ratings on the stock.

Soundview enterprise systems analyst Gary Helmig cut his fiscal 1998 earnings estimates for IBM to $6.60 a share, from $7.20 a share. He also cut fiscal 1999 estimates, to $7.40 a share from $8.25 a share, and lowered IBM's six-month price target to $114 a share from $124 a share. He maintained his rating of "short-" and "long-term buy."

Reuters contributed to this report.