IBM’s Fivefold Profit Gain Fails to Prevent Selloff : Stocks: Second-quarter shows marked improvement, but analysts expected more.
International Business Machines Corp. on Friday reported second-quarter earnings that failed to meet Wall Street expectations, resulting in a selloff of IBM shares that helped drag the whole market lower.
The Dow Jones average fell 29.99 points to 3,331.64. IBM’s earnings announcement and the reaction to it showed the fickleness of the financial community’s expectations game, since most measures of IBM’s performance showed substantial improvements from a year ago.
Profit for the quarter was up more than fivefold to $714 million, or $1.25 a share, compared to $126 million, or 22 cents, in last year’s disastrous second quarter. Revenue was also sharply higher, climbing 9.9%, to $16.2 billion, from $14.8 billion a year ago.
But the results fell at the low end of analysts’ estimates, which ranged from $1.20 to $1.40, and IBM stock plunged $5.25 to close at $95. IBM shares had gained about $10 over the last several months as investors judged that the worst of the company’s problems were over, but yesterday’s loss brought that run-up to an abrupt end.
“Expectations are a funny thing,” said Curt Rohrman, an analyst at First Boston. “If you go back to what people thought a couple of months ago, people would be pretty content right now.”
The growth in revenue was particularly good news for IBM, which is recovering from an awful 1991 that culminated in a program to break the company into quasi-independent business units. Analysts say IBM cannot improve its profitability in the harshly competitive computer business without solid sales increases, particularly if it sticks with its no-layoff policy.
Yet analysts also noted that the sharp increase in revenue didn’t bring a correspondingly strong improvement in earnings, leading to concerns about margins.
Barry Bosak, an analyst at Smith Barney, called the financial report “disappointing, inasmuch as revenue growth was ahead of expectations and earnings were at the low end of the range.” He cited weakness in personal computers and some parts of the disk drive business as contributing factors.
Rohrman also cited PCs as an area of concern. IBM is expected this fall to join the industrywide price war in earnest with a new line of cut-rate machines.
“They need to take major, aggressive actions in the PC business,” Rohrman said.
IBM Chairman John Akers said in a statement that revenue growth was “led by continued growth in our service and software offerings” and that “expenses remain under control.” The company plans to cut more than 20,000 jobs this year through attrition, early retirement incentives and harsh performance review procedures.
Despite the effect of the IBM earnings announcement on the broader market--and especially on the Dow Jones average, of which IBM is a major component--analysts did not regard the results as bad news for the economy or the computer industry in general.
