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Mainframes to drive IBM earnings

Big Blue hits a new 52-week high as it gears up to report third-quarter earnings that analysts say should be strong.

IBM yesterday hit a new 52-week high as it geared up to report third-quarter earnings that analysts say should get a boost from the company's mainframe business.

Big Blue closed at 139.375 a share, edging past its earlier 12-month high of 138.75, set last Thursday. The stock, which ended up 3.4375, has managed to gain more than 13 percent since closing at 123 on October 6.

Other stocks, ranging from those in the services sector to those in the PC sector, may ride on IBM's coattails following its earnings announcement. Analysts expect Big Blue to report earnings of 1.53 a share, up from 1.35 a year ago, according to First Call.

"A factor in their success could be the G5 mainframe. It carries high margins and hosts a side of software that also has high margins," said Kevin McCarthy, an analyst with Donaldson Lufkin & Jenrette. "I think they shipped enough of these out the door so this will be a favorable quarter."

But Jim Poyner, an analyst with CIBC Oppenheimer, said the prospects for the G5 are not so clear-cut, noting that production on the mainframes did not fully ramp up until late August.

Analysts agreed that there are few public companies with a large enough mainframe business to benefit from any upside news on IBM's G5 series. But Chuck Jones, an analyst with Salomon Smith Barney, said mainframe software companies like BMC Software and possibly Computer Associates could stand to gain.

IBM's services business, meanwhile, is expected to post year-over-year growth of 20 percent and to be one of the company's primary revenue- and profit-drivers.

"If they get higher-than-expected numbers because of their services business, it won't move other hardware makers' stock," Poyner said. "But if they got there because they had a dynamic performance with their PCs, then it may move others."

Predictions of softening sales out of Europe and the United States could send IBM and other hardware stocks tumbling, analysts cautioned. In past quarters, analysts have noted that strong sales out of Europe helped to offset weakness in Asia, meaning that, in the third quarter, the United States could be a swing market.

"Everyone is skittish about tech spending in 1999. If IBM says anything about orders slowing or being postponed, it will cause a sell-off in the stock and in the sector too," Poyner said. "I think there is less on the upside coming out of IBM to lift the sector and more on the downside."

McCarthy noted that if IBM's earnings are only in line with analysts expectations, and if company executives do not sound upbeat about fourth-quarter prospects, investors may sell off the stock on the belief there is no more good news for Big Blue going forward.

Several analysts said they won't be surprised if IBM beats estimates, noting also that an earnings performance north of 1.60 a share likely would further propel the company's climbing stock.