Net Climbs 50%, but IBM’s Stock Takes a Beating : Issues Heavily Traded as Investors Point to Lower Tax Rate and Discounting

The stock of International Business Machines dropped sharply Tuesday after quarterly earnings figures--even though they were up more than 50% from the same period the previous year--suggested that the computer maker remains under intense pricing pressure from rivals.

The stock fell to a closing $111.75, down $6, on news that IBM’s fourth-quarter profit met Wall Street’s expectations only because the company enjoyed a lower-than-anticipated tax rate. About 3.69 million shares of IBM stock changed hands, making it the third-most heavily traded stock Tuesday on the New York Stock Exchange.

The company’s financial prospects have come under unusual scrutiny lately as IBM has reorganized and reduced its work force in an effort to regain its former profitability after a three-year slowdown. But the quarterly results suggested that IBM will not soon return to the 20%-plus profit margins of the early 1980s, analysts said.

“They’re shipping a lot of computers, and their revenues are not bad, but their profit numbers show they’re discounting heavily,” said Ulric Weil of Weil Associates, a financial consulting firm in Washington. “They’re fighting a worldwide battle.”

For the quarter that ended Dec. 31, earnings were $2.09 billion, compared to $1.39 billion for the same period in 1986.

Analysts said the profit increase in part reflected the company’s 36.5% tax bracket, compared to a 41% bracket that most on Wall Street had been expecting. Also helping the figures were profits from the sale of shares of Intel Corp., stock buybacks that have reduced the number of outstanding shares and the beneficial effects of currency translation.

Stephen Cohen, analyst with Gartner Group in Stamford, Conn., said the company gained about 50 cents a share as it translated profits made abroad into weaker dollars.

Revenue for the fourth quarter was $18.01 billion, up 6.3% from the $16.95 billion posted in 1986. For 1987 as a whole, earnings rose 9.8% to $5.26 billion, while revenue was up 5.8% to $54.22 billion.

While revenue from IBM computer maintenance services, leasing, software and rentals met expectations, revenue from product sales fell short, analysts said. Revenue from product sales in the final quarter of 1987 grew 5.2% for the quarter, compared to 9.2% in the previous year.

Product Line Strengthened

Despite the analysts’ disappointment, IBM Chief Executive John F. Akers said in a statement that the results “demonstrate that our continuing efforts to make IBM more competitive are beginning to pay off.”

He said the company had strengthened its product line “from top to bottom” during 1987.

Akers said IBM has reduced its work force by 16,000 during the past two years and reassigned another 21,000 employees, many to jobs in which they will be dealing directly with customers.

IBM enjoyed booming growth in the early 1980s when it dominated hardware and software businesses with products of its own design. More recently, however, other companies in the industry are building products to the same specifications as IBM, and competition has stiffened.

The largest computer maker faces keen competition from personal computer makers such as Compaq; mid-sized manufacturers such as Digital Equipment and Hewlett-Packard, and makers of the largest, or mainframe, computers, such as Amdahl and National Advanced Systems.

Only in the model 3090 mainframe computer line does IBM enjoy the domination it had in years past, analyst Weil said. “They’re like Xerox in the 1970s,” Weil said. “This is the age of standardization, and they’re no longer so dominant.”

Weil said IBM earnings may receive a boost at the end of 1988 if sales of the new mini-mainframe computer, the model 9370, pick up. The product was to have helped IBM in 1987, but it suffered from a lack of software, allowing an unforeseen opportunity to such rivals as Digital Equipment and Hewlett-Packard.

Weil speculated that if the heady days of 20%-plus profit margins do return for IBM, “it won’t next year--it won’t be in this decade.”