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Suddenly, Ibm Can Hardly Find A Patch Of Blue


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SUDDENLY, IBM CAN HARDLY FIND A PATCH OF BLUE

For six years now, the once invincible IBM has been struggling to recover from an unprecedented earnings slump. It has revamped products, reorganized staff, and slashed payrolls. The goal: to be slimmer, faster, and more profitable. As the new year unfolded, IBM actually seemed once more to be clicking. Following a strong fourth quarter, its stock soared 31% in just two months (charts).

On Mar. 19, the balloon burst. First-quarter profits, the company told a stunned Wall Street, will be only about half of analysts' projections, or about 90~ a share. IBM shares saw 10% of their value vanish as they plunged 12 3/4 points, to 115 1/8, by day's end. Earnings of $1.80 would have run flat with last year's, when first-quarter sales reached $14.2 billion. Now, the quarter's sales will be flat, or $600 million less than analysts expected. They've revised their 1991 profit estimates, from around $10.35 a share to about $9.50. For 1992, estimates have fallen from about $11 to $10.50. If those forecasts come true, IBM still will be short of its peak earnings of $10.67 a share, set way back in 1985.

IBM's explanation: an unexpectedly soft worldwide economy and the disruptions of war in the Middle East. Across its product line, from PCs to minicomputers to mainframes, demand is poor, Big Blue told the analysts. Only workstations and software are doing "reasonably well." Overall sales in the U. S. have been flat for several years, but now Europe's strong contribution to IBM's total revenues--some 39%--is faltering, too. Except in Germany, European demand has been softening for 18 months. A weak dollar inflated profits abroad, notes Prudential Securities Inc. analyst Rick J. Martin, but the dollar's postwar surge has ripped away the "currency camouflage."

FRESH COMPETITION. Mainframe sales, which contribute an estimated 50% of IBM's revenues and 60% of its profit, have been disrupted more than outsiders had thought by last September's debut of a new family of processors, the ES/9000s. The largest, most advanced models won't be shipped until late this year. Meantime, more and more customers are eyeing alternatives, such as networks of small but powerful desktop machines.

IBM also faces fresh competition in mainframe disk drives, another high-margin item. It was alone in the market last year with its high-capacity 3390 drives. But now, Japan's Hitachi Ltd. is shipping equivalent machines, and Amdahl Corp. is about to do the same.

Meanwhile, customers' data processing budgets have grown the smallest amount since 1983. Prepared by managers facing a deepening recession and impending war, they've gained only about 2% from last year. Typically, the jump has run 6% to 8%. And, barring a miraculous turnaround in the economy, there's little chance computer spending will see an upturn anytime soon.

In personal computers, the name of the dismal game has been price-cutting. IBM has been unable to differentiate its PS/2s from the competition enough to avoid lowering prices against Compaq, AST Research, Dell Computer, and other makers of clones who are chipping away at IBM's core, big-company customer base. Moreover, IBM has been many months late with PC software called OfficeVision, which was to tie desktops into its mainframes. And, while it does plan a big product introduction on Mar. 26, to date it has been absent from the booming laptop market.

TIME TO TRIM? Much of this was known to Wall Street before Big Blue's balloon went pop. Several analysts even knocked IBM down from a "buy" rating to a "hold" as they caught wind of a soft quarter. But technology stocks have soared as a group lately, greatly outperforming the broader stock market. "The upward move was not propelled by earnings gains" but by overheated expectations, observes Marc G. Shulman, a computer analyst at UBS Securities Inc. On Jan. 10 he began warning clients of "danger ahead" in computer stocks. Now, with demand softening in the U. S. and abroad and the dollar rising, investors face "the worst of all possible worlds," Shulman says.

Predicting which computer stocks will suffer along with IBM is pretty tough. Amdahl, a maker of IBM-compatible mainframe gear, and Digital Equipment Corp. on Mar. 19 saw their stocks tumble 1 3/8 and 5 1/4 points, respectively, in sympathy with IBM. On the other hand, Apple Computer Inc. enjoyed a 2.6% rise even as the Dow Jones industrial average plummeted 62 points. But there's no doubt the computer industry will see more pain in coming months. Take Wang Laboratories Inc. After letting 500 staffers go in January, it has just begun a new round of layoffs that includes engineers working on its flagship image-processing products.

Yet even as most other computer stocks take their lumps, there's some reason for long-range optimism at Big Blue. IBM's revenue shortfall may prompt further efforts to cut expenses this year through restructuring or reduced capital spending. Indeed, Steve Cohen, a Soundview Financial Group Inc. computer analyst, is looking for IBM to finally trim its overseas payroll, which has been growing at the same time Big Blue slashed its U. S. staff by 30,000. Then, Cohen points out, IBM will be all the more ready to profit in 1992 from what he and others reckon will be its most competitive lineup of products in 10 years.John W. Verity in New York


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