=DJ TALES OF THE TAPE: Big Blue Turning Red Hot In Mkt Slump
05 Mar 14:00
By Donna Fuscaldo
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Big Blue might just be the red hot technology company
of 2001.
Many investors are eyeing the old stalwart, International Business Machines
Corp. (IBM), as a safe haven while the tech bust of 2000 continues into the new
year.
"Safe haven" isn't usually synonymous with tech stocks, but consider this:
while IBM's stock is down 22% from its 52-week high, it's still performing
better than many of its peers, who watch their market caps evaporating daily.
Take rival Sun Microsystems Inc. (SUNW). Its stock is down 69% from its
52-week high, and it isn't alone. Hewlett-Packard Co. (HWP) is off 55% and
Compaq Computer Corp. (CPQ) is trading 42% lower.
So what makes Big Blue attractive to investors amid the tech-stock carnage?
Stability.
"Slower growth, lower multiple, more stable companies (like IBM) are viewed
as safer tech companies," said Rob Joseph, vice president of State Street
Research. "Names like IBM and Microsoft have held up nicely."
For years IBM has been a defensive stock and a good place to park money when
you didn't know what else to do in technology, noted Laura Conigliaro, a
high-profile computer hardware analyst at Goldman Sachs & Co. "Certainly IBM is
one of the places they (investors) look at, even when it wasn't doing as well,"
she said.
Indeed, IBM is a slow-growing company. While Sun posted revenue growth of 44%
in the December quarter, IBM struggled to produce revenue growth of 6% for the
same period. And this was only the second quarter this year the $90 billion
giant had any revenue growth at all.
But as luck would have it, IBM's lackluster growth, which hurt its stock last
year, may be helping it this year.
"IBM has not been subject to the valuation swings or inflation that a number
of the companies in the tech space were subject to," said Matt Considine,
portfolio manager, large cap growth fund, at BlackRock. "From a relative
valuation perspective, it's attractive."
Indeed, Salomon Smith Barney has a $135 price target on the stock, which
traded recently at $105, up $2.70.
IBM declined to comment on its stock movement.
Earnings Warnings At Bay
Big Blue never surged as high as the Ciscos of the world so it didn't
disappoint investors when it wasn't able to sustain record growth, said John
Waterman, chief investment officer at Rittenhouse Financial Services, which
manages assets of $18 billion and holds about 3.5 million IBM shares. "Right
now it has a roughly 14% five-year growth rate and sells about 20 times this
year's earnings," he said.
Sun Microsystems, by contrast, sells for about 48 times fiscal 2001 earnings,
according to Salomon Smith Barney's estimate.
In addition to enjoying a lower valuation, which would have been a stigma at
the height of the tech rally, IBM is one in an elite group of companies that
didn't pre-announce weak earnings for the December quarter or paint a bleak
picture for 2001
For its fourth quarter Big Blue reported earnings of $1.48 a share, 2 cents
higher than Wall Street's expectations. Revenue came in at $25.6 billion,
beating the $25.47 billion expectation. The company's eServer unit saw revenue
growth of 35% in the fourth quarter.
More important, however, were IBM's comments that barring a worsening of the
economic climate, it expects to meet high-single-digit revenue growth and
earnings per share expectations for 2001.
A stark difference from H-P and Sun, both of which couldn't provide much in
the way of forecasts because of uncertain economic conditions.
"Just about everyone else has come out and said they are not making earnings
and have no visibility, and IBM so far hasn't," said Rittenhouse's Waterman.
But there are still concerns that "the last guy standing" may indeed fall, he
said.
And if Big Blue was to fall from this eliteclass, Waterman said the stock
would come down along with it, even if it looked cheap at the time.
Boost From Services Unit
What's cushioning IBM from the damage afflicting so many of its tech
brethren? Its Global Services unit.
Services account for 37% of IBM's revenue and during the fourth quarter Big
Blue said it signed new outsourcing contracts with a total value of $12.5
billion. That helped boost its outsourcing backlog to $85 billion at the end of
2000 from $60 billion at the beginning of the year.
IBM's peers in the services space, particularly Electronic Data Systems Corp.
(EDS), continue to say the services business is not only strong but seems to
be getting better, said Conigliaro. Although IBM doesn't give an ongoing update
of how well various pieces of the business are doing, "we do have a sense from
them ... that they are building big amounts of bookings," she said.
Benjamin Easow, an analyst at Northern Trust, said IBM's services business
"acts like an annuity and thus investors are flocking toward companies that
have consistent revenue streams in this difficult environment." Easow noted
that services provides a cushion, while hardware companies like Sun or EMC
Corp. (EMC) experience difficulties.
But Zack Shafran, a portfolio manager at Waddell & Reed, which doesn't hold
shares of IBM at the moment, said while services may be a lure for investors,
the segment is poised to become more competitive.
"EDS said it will maintain its competitiveness and will get more competitive
on price. And KPMG recently went public and services is now separate from their
accounting parent," he said. Shafran believes that KPMG Consulting Inc. (KCIN)
will also be a formidable competitor to IBM's services group.
What Happens When Economy Improves?
Sure investors may be flocking to IBM now, but what happens when the economy
recovers. Will its stock still be able to outperform peers?
"IBM will never be a homerun stock," said Rittenhouse's Waterman. "But with
the potential to grow in the 14% range it will deliver relative consistent
growth."
And Goldman's Conigliaro, who has a market outperform rating on IBM, said
"there is no question when the economy turns (investors will want) to go with
something different, to get higher growth prospects and greater leverage more
focused in a single industry." However IBM is a "gradually improving company"
and is not just an investment for the bad times," she said.
-By Donna Fuscaldo; Dow Jones Newswires; 201-938-5253;
donna.fuscaldo@dowjones.com
(END) DOW JONES NEWS 03-05-01
02:00 PM |
