Andrew Neff wrote most of Friday's report cutting his rating on International Business Machines Corp on Thursday -- hours before Chief Executive Louis Gerstner spoke at IBM's bi-annual analyst meeting in Manhattan.
Gerstner might have changed Neff's mind, the Bear, Stearns & Co analyst says. He didn't.
Neff lowered his rating on the biggest computer maker to "attractive" from "buy," his first change of opinion on IBM in three years. IBM shares, up 32 percent so far in 2001, are getting close to historical highs relative to earnings, and sales in the year's second half aren't likely to match last year's growth, he wrote in the report.
"We wanted to see if there would be anything said to cause us to think differently" at the conference, Neff said in an interview. "What if they said that business is wonderful?"
Neff was the only analyst to change his rating among 11 Wall Street analysts who published reports on IBM Friday, according to Bloomberg data. Others reiterated their previous opinions. Of 25 analysts that cover IBM, 21 rate the company a "buy" and four rate it a "hold." Addressing about 400 analysts and investors in a basement auditorium in the Equitable building, Gerstner said IBM is concentrating on cash flow, earnings growth and market share, rather than revenue growth. He spoke about growth in computer networks and the devices linked to them.
Gerstner and other IBM executives have made similar remarks before. He avoided speaking about the Armonk, New York, company's financial status.
"We either had to come out of the meeting and raise the price target or lower the rating," said Neff, who is ranked No. 3 among personal computer hardware analysts in Institutional Investor magazine's 2000 annual survey. "We didn't see any reason to raise the price target."
He left his stock price forecast at US$120. IBM Friday fell US$3.39 to US$111.81.
Neff, 44, divides technology stocks into "six buckets of value," he wrote in the report. He puts IBM in the "old growth" bucket, which means he uses price-earnings ratios relative to the market as a valuation tool.
IBM has typically peaked at a 20 percent premium to the Standard & Poor's 500 Index, he wrote, and is now trading at a 10 percent premium. That limits the chance of its stock price rising much further, he said.
The stock now trades at 25 times Neff's 2001 earnings estimate of US$4.60 a share, while companies in the S&P 500 trade at 22.7 times next year's earnings, he said. His IBM earnings estimate is below the US$4.85 a share analyst consensus, according to First Call/Thomson Financial Neff, who has covered personal computers for 13 years, said he has a more "conservative" estimate based on demand for PCs, "slightly disappointing" new service signings in the first quarter and a challenging economic environment.
It will also be hard for IBM's business to grow during the last six months of the year at the same level as the year before, Neff said.
IBM reported a 28 percent increase in net income in the fourth quarter in 2000 to US$2.67 billion, or US$1.48 a share, as sales of mainframe and server computers, custom semiconductors and computer services met or surpassed analysts' forecasts. Neff expects IBM to post earnings of US$1.43 a share for the fourth quarter this year.
"While its diversified business model provides consistent earnings and cash flow growth and relatively high degree of earnings predictability, the business comparisons start getting tougher for IBM in the later part of 2001," particularly in the fourth quarter, Neff wrote in the report.
In his report Friday, Credit Suisse First Boston's Kevin McCarthy said that while IBM's profit has surpassed many of its competitors, it won't "emerged unscathed" from a global decline in demand for information-technology services. McCarthy has a "hold" on the stock.
Top-ranked analyst Donald Young of UBS Warburg left his rating at "strong buy" and Goldman, Sachs & Co's Laura Conigliaro kept her "recommend list" rating on the stock.
Merrill Lynch's Thomas Kraemer reiterated his "near-term neutral" recommendation and Lehman Brothers' George Elling maintained his "strong buy" rating.
Neff soured on other PC makers in September after Apple Computer Inc said fourth-quarter profit would be below forecasts.
He lowered his recommendations on Apple, Dell Computer Corp and Gateway Inc to "neutral" from "buy," saying sales growth was slowing throughout the industry. He didn't adjust his rating on IBM at the time.
"One of the reasons we had downgraded PCs in September is our goal is to try to anticipate things," Neff said.
"I don't want to wait for a conference call with IBM where they give you new guidance or talk about a challenging environment. I prefer to get in front of that."
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