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Analyst bullish on IBM
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July 21, 1998: 11:49 a.m. ET
Graham-Hackett says computer giant will fix inventory problems, boost sales
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NEW YORK (CNNfn) - IBM reported its second quarter results yesterday, coming in a penny better than expected. Battling a strong dollar, bloated inventories and slumping sales in Asia, Big Blue turned in earnings of $1.50 a share.
The company advised investors not to alter their long-term view on the stock or its earnings prospects. Investors responded enthusiastically Tuesday, sending shares up $7 in mid-day trading.
Megan Graham-Hackett, technology analyst with S&P Equity Group follows IBM and technology companies in general. She joined "Business Day" to take a closer look at IBM and other technology stocks.
Following is a partial transcript.
DEBORAH MARCHINI, CNN ANCHOR: Do you think IBM's guidance is correct, that this quarter doesn't materially change the outlook for the whole year?
MEGAN GRAHAM-HACKETT, TECHNOLOGY ANALYST, S&P EQUITY GROUP: Yes. I think what they were saying was basically "analysts don't change your earnings expectations for the year." Revenue was a little bit lighter than most analysts were looking for (this quarter). However, for the rest of the year, they should come through on their earnings estimates overall.
MARCHINI: You mentioned the sales. Compared to some of their competitors, their sales were pretty dismal. They didn't really grow, where sales at Microsoft (MSFT), Sun (SUNW), Compaq (CPQ) were way up.
GRAHAM-HACKETT: Right. I don't think that there is an easy comparable for IBM. It's got a very big global presence. And whereas Sun is also exposed to those Asian countries with those negative currency fluctuations, IBM has had a two-fold problem. One, they have a transition on one of their larger servers, the S390. And they're introducing a new server. And therefore, customers defer purchase of these new high-end servers. So they got hit in that area.
Also, you know, IBM had excess PC inventories, which Sun doesn't have. So they didn't have that negative impact. IBM said if the PCs hadn't been issued this quarter, their revenues would have been up actually 10 percent.
JOHN DEFTERIOS, CNN ANCHOR: This is a case where diversification actually helped out because service was very strong, and it counter-balanced that stock up in inventories.
GRAHAM-HACKETT: Right. And software was actually very strong, versus other prior quarters. So they've been showing that they've had a good diverse portfolio -- and that's really helped cushion these falls.
DEFTERIOS: Well, a number of companies are trying to shift out of Asia and make it up in Europe. Is it enough to counter-balance the company for the rest of the year?
GRAHAM-HACKETT: I think they've done a very good job doing that. You had a short fall in revenues this quarter that was surprising, and yet, earnings held; gross margins held; they cut expenses. They're doing all the right things. So we think it bodes well for the rest of the quarter.
MARCHINI: The stock is about 7 points or so off its 52-week high of 129. Where do you think it's going?
GRAHAM-HACKETT: I think it can easily get back to the 129, 130, maybe mid- 135. It's going to be on the next two quarters. They've given an endorsement of the earnings estimates, and now they just have to execute and pull them through.
DEFTERIOS: It's my perception that the PC makers now are back in favor on Wall Street. Dell's done extraordinary; Compaq's coming back. Is the demand going to be there in the fourth quarter that everybody is hoping for, though?
GRAHAM-HACKETT: I think what we got was a reassurance. Things are bad in the PC inventory issue, plaguing the first and second quarter. But PC demand overall is fine. And I think we've gotten an endorsement from Intel (INTC), Compaq, Dell (DELL), all saying that what they're seeing is underlying demands holding up. So investors are saying, yes, the first and second quarter were difficult, but underlying PC demand is holding up, and that bodes well for the third and fourth quarter. 
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