IBM Stock Takes a Fall Following Report of Slackening Foreign Sales
IBM’s stock took a drubbing Tuesday as word of an unexpected softening in the company’s strong overseas business overshadowed IBM’s long-awaited introduction of a new family of business computers and fueled forecasts of even lower third-quarter earnings than Wall Street has predicted.
In an otherwise lethargic day of trading on the New York Stock Exchange, the price of International Business Machines stock fell $5.375 a share to $128.125.
The sharp decline apparently was fueled not by reaction to the company’s new computer line but rather by new insight into IBM’s until now strong foreign sales that securities analysts gleaned from a meeting Tuesday with company executives.
IBM spokeswoman Pamela Hawkins later confirmed for reporters that “while still growing,” IBM’s overseas business “is beginning to moderate.”
As a result, she said, worldwide orders and shipments for the first nine months of 1986 are now expected to trail year-ago levels.
That is bad news for IBM because its domestic sales and earnings have been under pressure all year, and the company has banked on strong foreign sales to buoy overall revenue.
Analysts had been gradually cutting their third-quarter and full-year earnings estimates for IBM and were expecting the company to report next week a year-to-year decline in third-quarter earnings. Most also have been predicting a second consecutive full-year earnings decline--a first for IBM since the Depression.
Even so, until Tuesday, analysts’ forecasts had factored in continued strong overseas business.
Word of further problems came at an inopportune time for IBM. The company, in uncharacteristically grand fashion, on Tuesday announced its latest strategy for beating back Digital Equipment Corp. and other competitors in the part of the computer market that has proved most irksome to IBM: minicomputers.
Central to its new strategy is a family of four business computers that run on software originally designed for much more expensive and powerful mainframe computers. The smallest of this new 9370 line, for example, starts at $31,000, much cheaper than the multimillion-dollar System 370 family of mainframes whose software the 9370 will share.
The new line thus is designed to extend powerful 370 mainframe processing power to small offices and departments of big companies in a more compact, less expensive and easier to use and install machine. IBM said the 9370 will take up as little space as a two-drawer filing cabinet and will cost as much as 50% less than businesses currently would pay for equivalent power in an IBM computer.
At the same time, the company announced a switch from single-priced software to a graduated pricing system. Customers using IBM computers with more processing power will pay more for the application software. Bulk customers also will qualify for new discounts.
IBM further announced new software packages tailored to such industries as retailing and financial services and introduced a converter that will let its two families of mid-range computers speak to each other. Those families are the System 370, which the new 9370 line becomes part of, and the System 36 and 38, which IBM earlier this year had touted as its flagship departmental computer.
Analysts and computer industry consultants gave the new line mixed reviews.
The new computer family goes a long way toward resolving IBM’s chronic incompatibility problem among its minicomputers, these observers said in affirming IBM’s declaration at an afternoon press conference here that the 9370 line “makes us more competitive from a total system point of view.”
IBM stopped short of putting all of its computers--from the smallest and “dumbest” to the largest and most powerful--on speaking terms. Yet that is precisely what Digital offers customers and what analysts say IBM must do, and soon, if it is to stop inroads into its primary market--Fortune 500 companies--by the much smaller Digital.
“They’re adding a few more components to the scenario, but it still doesn’t resolve the issue of a totally compatible network because IBM still hasn’t completed the picture,” said Brian Jeffery, managing director of the International Technology Group, a Los Altos computer industry consultant.
How aware IBM is of this criticism and how important it regards this new line was apparent in the days leading up to Tuesday’s announcement. It alerted reporters to a major announcement several days earlier than usual. And on Tuesday, it introduced the new line to computer users in a nationwide video announcement, marking the first time that IBM has so announced a new product.
IBM said its new computer family won’t be ready for widespread shipment until the second half of next year. Even so, analysts say businesses will start re-evaluating their computer needs immediately--bad news, they say, for many of IBM’s minicomputer competitors.
