An Earlie sighting -g-
By GRETCHEN MORGANSON
>>NEW YORK -- Investors who were worried that technology stocks were in for
some rough sledding can sleep easy. Last week's surge in shares of IBM
proves that the bull is back in technology.
Not that the news is rosy all around. Wounds from Compaq Computer's
disastrous first quarter are still fresh, as are warnings about the
current scene from Intel, Sun Microsystems and companies that sell
personal computers.
What happened late last week was a shift in investors' perceptions of
reality. Investor optimism can cover a multitude of sins.
The about-face in sentiment was a result of IBM's first-quarter earnings
report. The company clocked a 15 percent increase in sales and a 42
percent climb in earnings. The news pushed Big Blue's shares up 16.2
percent in the final two trading days of the week, to $199.75.
Sure, the report was good. But was it worth an extra $26 billion in
market value?
The biggest surprise in IBM's numbers was a rebound in the company's
sales of hardware, its largest business. Analysts expected 2 percent
growth in hardware revenues; IBM produced a 17 percent gain.
Most of that growth came from PC sales, which typically account for
one-third of IBM's hardware sales. But the stellar performance dims just
a bit when you look closely at what it's being compared with: In the
first quarter of 1998, PC sales were a dreadful $2.4 billion, well below
the $3 billion that analysts estimated were sold in the comparable
period of 1997. No wonder the $3.6 billion for the latest quarter looked
good.
Even with the increase in sales, the company lost $89 million in its PC
business during the three months. Losses, at least in bear markets, are
typically frowned on by investors. But in bull markets they are
forgiven.
Investors ignored IBM's loss because it came in so much lower than the
$458 million the company lost in PCs in the first quarter of 1998. Fred
Hickey, editor of the High Tech Strategist, a newsletter based in
Nashua, N.H., said that all the hoopla over the hardware recovery masked
the fact that outside of PC sales, hardware revenues were flat in the
quarter.
Investors also shrugged off IBM's 20 percent drop in PC revenues from
the last quarter of 1998 to the first quarter of this year. Sales always
fall after Christmas, of course, but IBM's decline was roughly twice the
first-quarter drops recorded by the industry in recent years.
Since December, shareholders' equity, the company's net worth, has
fallen 5.8 percent. It is down from $24 billion in 1995 to $18.3 billion
today, eroded mainly by IBM's share buyback program.
The number of shares outstanding has declined by 22 percent since 1995,
making earnings per share look better. But the cost of the program --
$2.1 billion in the first quarter -- is high. Since IBM's cash flow
couldn't cover it, the company borrowed to buy the shares. Its debt has
climbed from $22.6 billion in 1995 to $30 billion now.
Larry Woods, editor of the Tech Review newsletter in Stony Creek,
Ontario, points out that for 1997 and 1998, IBM showed average annual
revenue growth of 3.7 percent, but that annual growth in operating
profit declined from 5.8 percent to 0.7 percent.
The stock was up 150 percent during this time. "It's a growth stock, all
right," Woods said. "But is it a growth company?" << |
