IBM Warning Sends Its Stock and Dow Lower
International Business Machines Corp. said Wednesday that it expects narrower profit margins and lower overseas earnings in coming quarters, sparking renewed worries about the outlook for the technology sector. The company’s warning overshadowed its announcement of a better-than-expected profit for the first quarter and a 40% dividend increase.
The news sent IBM stock down $10.25 to close at $105.25, a 9% drop and that issue’s biggest one-day slide since Dec. 12, 1992. That in turn sent the Dow Jones industrial average plummeting 70.09 points, its biggest slide since March 8 and sixth-largest this year. IBM alone took 30.4 points from the 30-stock average. However, the rest of the stock market was only modestly lower.
The profit-margin warning by IBM, the world’s biggest computer company, stems from the need for the company to maintain an aggressive pricing strategy in the face of increasing competition, as rivals introduce new mainframes, storage units and powerful desktop computers.
The pressures on IBM also reflect those on other computer makers, chip makers and software developers, whose sales growth is expected to slow from last year’s robust levels.
“People looked at 1995 results for technology companies and expected that for 1996,” said analyst Bob Djurdjevic of Annex Research in Phoenix. “1996 will be a difficult year.”
A slowdown in demand for personal computers and declining prices for computer chips has hurt companies such as Compaq Computer Corp., Intel Corp., Texas Instruments Inc. and Digital Equipment Corp. The global PC market is expected to increase about 17% this year, compared with a 24% increase last year. The $154-billion-a-year chip market will see growth rates drop to less than 20% from 1995’s 40%.
IBM Chairman Louis Gerstner Jr. described the first three months of the year as “good but uneven.”
IBM earned $1.35 billion, or $2.48 a share, up 4.7% from $1.29 billion, or $2.12 a share, a year ago. With charges for software acquisitions and job cuts, the 1996 quarter’s net income was $774 million.
The company was expected to report per-share earnings of $2.35 excluding charges, according to the average estimate of 13 analysts by Zacks Investment Research Corp.
Sales for the quarter rose 5.2% to $16.56 billion from $15.74 billion.
IBM boosted its dividend, from 25 cents to 35 cents a quarter, the first since Gerstner took charge of the Armonk, N.Y.-based company in April 1993. IBM’s quarterly dividend was cut to 54 cents in 1993 from $1.21 in 1992, and cut again in the third quarter of 1993, after IBM posted an $8.1-billion loss for the second quarter. The last time the dividend was increased was in 1989, to $1.21 from $1.10.
IBM’s stock rose as high as $120.125 after the company released its earnings report. But the share price dropped after Chief Financial Officer Rick Thoman told analysts and investors that IBM’s gross profit margin would fall and that a stronger dollar would hurt results in coming quarters.
Thoman said IBM intends to continue its aggressive pricing strategy for all products. PC sales could have contributed as much as $250 million more to IBM’s revenue, but the company was trying to decrease the distributor inventories.
Sales of the AS/400 minicomputers and Systems 390 mainframes both declined, as did sales of storage products. That is disappointing, analysts said, because those are IBM’s flagship products and are responsible for much of the hardware profit.
“Nobody buys IBM [stock] for PCs, they buy IBM for AS/400 and System 390,” said analyst David Wu at the Chicago Corp. And software revenue grew slower than expected, rising only 5.7 % to $3.04 billion from $2.87 billion in the year-ago quarter.
To be sure, some investors said they are not worried about IBM’s long-term prospects because of the company’s broad array of products, services and technology. “I don’t see anything in IBM that is worrisome,” said Bill Miller, portfolio manager at Legg Mason Inc., which owns IBM stock.
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Off the Peak
IBM shares more than doubled between 1994 and February of this year as the company restructured. But with Wednesday’s plunge of $10.25 to $105.25, the stock is off 18% from its 1996 peak of $128.88. Monthly highs and latest:
Wednesday: $105.25
Source: TradeLine
