Goldman Sachs Co's Laura Conigliaro says investors attracted by the steady earnings of International Business Machines Corp's computer-services business may be seeing only half the picture.
While that business's multiyear contracts provide a refuge in a slowing economy, they account for about half the company's profit, she said. The rest comes from sales of computers, semiconductors and software, which will be pinched as corporate customers delay or cancel purchases.
As a result, earnings at the biggest seller of computer hardware and services this year and next are likely to fall short of estimates, Conigliaro said. IBM shares, which have rallied 14 percent in 2001, might give up their gains, she said.
"There's a reality that has to be faced," Conigliaro said in an interview. "I don't think IBM is going to be able to sidestep" the effects of an economic slowdown.
With the Sept. 11 terrorist attacks aggravating a yearlong decline in spending on computer and communications equipment, "this is a pretty bad and sweeping economic environment," she said.
Conigliaro's concern shows the double-edged sword investors face during a slowdown: Stocks with the most recession-resistant profits rally, making it all the more important that earnings meet expectations.
"With more than US$80 billion in total revenue and the economy we're going through, how can IBM not get hurt?" said Vincent Muscolino, an analyst at David L. Babson & Co in Cambridge, Massachusetts.
"If they have an earnings problem, it will obviously hurt the stock," said Muscolino, whose firm manages US$60 billion and owns IBM shares. "You have to remember that this stock has been a horse this year." IBM's advance has come while the Standard & Poor's 500 Index has dropped 18 percent and the S&P Computer Systems Index, which includes IBM and rivals such as Dell Computer Corp, EMC Corp and Sun Microsystems Inc, has plunged 36 percent.
Conigliaro, the No. 2 computer hardware analyst in last year's poll of money managers by Institutional Investor magazine, cut her fourth-quarter profit forecast for IBM to US$1.25 a share from US$1.40 and her 2002 estimate to US$4.55 from US$5.05.
That puts her below the mean estimate of analysts polled by Thomson Financial/First Call, who are looking for US$1.38 this quarter and US$5.06 next year.
While analysts have been lowering IBM forecasts, the cut in Conigliaro's 2002 estimate and a similar move today by Sanford C. Bernstein & Co's Toni Sacconaghi are the biggest in the past 30 days.
IBM is expected to report its third-quarter profit and discuss the outlook for the fourth quarter and next year on Tuesday, and analysts are reviewing their estimates in anticipation. IBM officials don't provide specific profit forecasts.
Merrill Lynch & Co analyst Thomas Kraemer said on Wednesday that he "would not be surprised" if IBM suggested that fourth-quarter profit expectations are too high. Kraemer stopped short of cutting his forecast, though.
Conigliaro said that when she reviewed IBM's outlook, she decided it was time to reduce her estimates. Recent conversations with customers, including some yesterday, have shown that ``there is a lot of discussion about projects that are being pushed out'' to a later date, she said.
Muscolino said that analysts and investors have been concerned for some time that IBM's profit might fall short of forecasts. Conigliaro's comments today added to that concern.
He said that IBM looks expensive. After this year's gains, it trades for about two-times sales. Sun Microsystems, a rival maker of high-end server computers, has fallen 67 percent this year and sells for about 1.5 times sales, he said. Muscolino said he uses projected sales and adjusts for debt and cash on each company's balance sheet to make this comparison.
IBM shares rose US$0.11 to US$97.25 on Wednesday, erasing a 2.3 percent drop as benchmark indexes climbed.
Even as Conigliaro is warning investors that IBM shares may be in for a 15 percent decline, she has kept the stock on Goldman's "recommended list." Her argument is that IBM is a company with a good outlook beyond the next few quarters. After Sept. 11, she said, "I think the investment thesis of a lot of stocks in technology necessarily became longer term," she said. "No technology stock is safe in the short term."
Among the nine stocks Conigliaro covers, she has three on the "recommended list," two rated "outperform," three called "market perform," and one that's not rated. The top-rated stocks, along with IBM, are Sun Micro and EMC Corp.
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