Mike, Your favorite Forbes writer now works for the NYT. Does that mean it is now an acceptable paper in your eyes? <g>
May 15, 1998
Market Place: Value of Spin on Wall Street to Two
Companies
By GRETCHEN MORGENSON
NEW YORK -- What's the value of some good spin on Wall Street nowadays? By
Thursday's reckoning, about $15 billion.
That's a conclusion one can draw from looking at
trading in the shares of Hewlett-Packard and
IBM, two of the biggest technology companies.
In heavy trading Thursday, Hewlett-Packard's
shares fell 14 percent, or $11.3125, to close at
$70.3125 -- erasing roughly $12 billion in
stock-market value. The largest one-day drop for
Hewlett-Packard in almost six years came after
the company warned analysts late Wednesday that
second-quarter results would be far weaker than
expected. Management said earnings would be 65
cents a share, well below the 78 cents analysts had
anticipated.
Usually other companies in the same business also
fall on such news. Indeed, Dell Computer shares
ended the day down $3, to $95.25, and Compaq
Computer slipped 31.25 cents, to $31.5625.
Not IBM. At one point during Thursday's trading, its shares were up more than $7, or 6
percent, to $129.3125, an all-time high. It ended the day up $3.9375, at $125.8125 --
adding about $3 billion in stock-market value.
Investors piling out of Hewlett-Packard seemed to head straight for IBM. Why? One
reason may have been that investors liked IBM's price-earnings ratio, which is lower than
Hewlett-Packard's. Also, even as Hewlett-Packard was warning investors of its
troubles, Louis Gerstner Jr., IBM's chairman and chief executive, was painting a pretty
picture for analysts of where his company would finish the year.
Never mind that personal-computer price wars are escalating. Forget that IBM's
mainframe market share is down. So what if revenue growth is in the low single digits?
Gerstner, who talks to the Street but once a year, said the long-term future looked bright.
Analysts raved.
To be sure, if IBM can get growth in its services business back up to 20 percent, as
Gerstner hopes, the company's revenues could again reach double-digit increases. That
hope was what Wall Street was responding to Thursday.
But the tale of how these two companies' stocks traded Thursday also reveals how
important spin by a chief executive is in today's market. While IBM's chairman knows
how to charm analysts, Hewlett-Packard's chief, Lewis Platt, does not. Lou and Lew
could not be more different.
"While Gerstner usually makes his number because he knows how to guide analysts
lower, Hewlett-Packard just drops the bomb," said Fred Hickey, an independent
technology-stock analyst and author of The High Tech Strategist newsletter.
It has not helped that Hewlett-Packard has dropped more than one bomb recently.
According to Kevin McCarthy, technology analyst at Donaldson, Lufkin & Jenrette,
Hewlett-Packard has missed estimates in five out of its last six earnings announcements,
often surprising analysts.
IBM, conversely, warned Wall Street as long ago as January that its first quarter might be
disappointing. When it came time to post the results in April -- profits down 13 percent
from a year earlier -- IBM's stock rallied more than 3 percent.
Obviously, Gerstner knows how to manage the Wall Street community well. It is a skill
that is becoming more and more crucial for any major player in the computer business. A
vicious price war is raging among personal-computer makers, competition is increasing
among companies offering to service customers' computer systems, and problems in Asia
continue to pressure PC sales.
Unit sales growth, which averaged around 25 percent annually in recent years, has
slowed to 13 percent this year. While revenue growth for computer manufacturers used
to average 20 percent a year, Dataquest, a technology analysis concern, estimates that
sales will come in at 4 percent this year. Some think that estimate is optimistic.
The fact that investors loved IBM and hated Hewlett-Packard on Thursday is all the
more interesting given how similar the two companies are. Both manufacture personal
computers as well as larger mainframes, software and peripherals. Both derive a good
amount of revenue -- 15 percent in Hewlett-Packard's case, 25 percent in IBM's --
from servicing customers' information systems.
Although IBM's roughly $8 billion in 1997 sales makes it almost twice as large as
Hewlett-Packard, both saw profits decline around 13 percent in the most recent
quarter. The two companies also have almost identical net profit margins:
Hewlett-Packard's were 7 percent last year, while IBM's were 7.5 percent.
But other measures put Hewlett-Packard far ahead of IBM recently.
Hewlett-Packard's revenue growth of 16 percent so far this year looks fabulous against
IBM's 1.8 percent gain. While hardware sales at IBM were down 8 percent in the first
quarter, PC unit shipments at Hewlett-Packard grew by 72 percent. Over the past five
years, Hewlett-Packard has increased its earnings more than 26 percent annually; IBM
has boosted earnings on average 15 percent a year during the same period.
The big difference to investors Thursday was Gerstner's skill with analysts. Not that he
actually forecast higher earnings, mind you. McCarthy reported that Gerstner was simply
encouraging analysts to think that returning to double-digit revenue growth was a
possibility.
Call it the power of positive spin. |
