IBM quarter passes expectations

IBM surprised analysts today with better-than-expected results in its third quarter, returning a profit of $1.4 billion, or $1.38 per share, on revenues of $18.6 billion.
Written by Larry Barrett, Contributor

Analysts surveyed by First Call had expected a profit of $1.36 per share on revenues of $17.8 billion to $19 billion.

"Not bad," said Sheldon Grodsky, an analyst at Grodsky Associates. "It's a clear sign that IBM's making the tough choices and seeing them through. This is a much different company and stock story than just three or four quarters ago."

IBM shares closed up $2.06 to $97.50 before the earnings results were announced.

Company officials said a strong U.S. dollar in Europe and Japan hindered profit margins, costing IBM about 14 cents per share in profit.

Hardware sales in the quarter were flat at $8.3 billion. Software accounted for $3 billion in revenue, a 2 percent decline from the second quarter.

But the services segment grew by 20 percent to more than $4.7 billion in the quarter.

"We're very pleased with strides our services business have made," said IBM Chief Financial Officer Larry Ricciardi. "We're on track for year-end sales and profit targets despite some pretty hard hits from currencies and ever-increasing pricing pressure."

Bill Milton, an analyst at Brown Brothers Harriman, was surprised IBM eclipsed the $1.36-per-share mark.

"It wouldn't have surprised me at all if they would have been off a penny or two this quarter," he said. "You look at how other disk drive makers and PC makers did this quarter and figure they might feel it too. The DRAM business is worse. Lots of little things could have contributed to a shortfall, but it didn't happen."

Ricciardi said IBM gained market share in the commercial PC market, although revenues remained flat.

"But there's no question that we clearly lost share in the personal PC market," he said. "An overall industry slowdown and the normally strong mobile PC market is suffering as supply has caught up to demand. Also, we deliberately targeted the high-end of the market with our Aptiva line. Now, it's clear that the sweet spot of the market has shifted to the lower- to mid-priced PCs."

Brian Eisenbarth, an analyst at Collins & Co., said the so-called "whisper" number on Wall Street was a couple cents below the First Call estimate.

"There was a lot of talk about the currency problem and whether some analysts had adjusted for it, but it was a moot point," he said. "It's pretty impressive considering how a company like Sun [Microsystems Inc.] had such a poor quarter and is in virtually the same markets as IBM. It's another solid quarter."

Eisenbarth said IBM's stock has a "buy" rating and a 12 to 18 month target price of $125 per share.

"They just announced some new boxes for under $1,000 like the others that are flying off the shelves these days," he said. "The stock's trading at a relatively low multiple compared to the likes of Sun or Hewlett-Packard [Co.]. It should be a strong stock for the foreseeable future."

Analysts expect IBM, of Armonk, N.Y., to return a profit of about $7.05 per share in fiscal 1997.

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