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The Big Blue Bulls Are Running


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THE BIG BLUE BULLS ARE RUNNING

It almost could work as a hit sci-fi thriller: A once-invincible computer giant stumbles and loses ground to nerdy, bespectacled upstarts. The hulking ex-hero struggles for a comeback. Nothing seems to click. A big operating loss dashes Wall Street's hopes. The stock sinks to a nine-year low.

But wait! Suddenly, the giant swallows a bitter pill: Over seven months, it reorganizes, slashes its payroll, spends big bucks on a new image. In just eight weeks, the stock rebounds by 20%. Playing right now on a screen near you: Big Blue Returns.

Yes, indeed, IBM is back--at least, as far as Wall Street is concerned. The computer colossus saw its stock plummet from a high of 137 last year to under 82 in April. Since then, though, the shares have climbed back steadily, to near 98 (chart). In fact, the stock has proved to be one of the strongest high-tech issues around: During its recent climb, the Standard & Poor's computer portfolio, excluding IBM, sank 18%.

ROCK BOTTOM. What has changed? Not IBM's growth prospects, analysts say, just investors' perceptions. "The business is headed in the right direction," says Steven Milunovich, computer analyst at Morgan Stanley & Co. Inc. "People are taking IBM's management seriously about trying to reach 18% return on equity"--vs. 1990's 14.8%.

Big Blue's biggest bulls project that its shares could hit 120. That assumes, however, a vibrant worldwide economic rebound. More likely, the stock will settle in the 110-plus range, where the price-earnings multiple would be a reasonable 14 or 15, Soundview Financial Group Inc. analyst Stephen P. Cohen suggests.

Cohen, who has been bearish on the stock for several years, now is warming up, even though he reckons IBM's total revenues this year will grow just 4.2%, to $67 billion. Profits could look decidedly better: Cohen and others recently upped their 1992 earnings estimates from below $7 to as much as $7.50.

In truth, investor psychology on IBM couldn't have gotten much worse than it was early this year. In 1991, IBM posted its first loss in decades--99 cents a share. Then, IBM Chairman John F. Akers announced a massive refocusing of the company, creating a "federation" of independent businesses.

In the following quarter, ended Mar. 30, IBM's earnings hit $1.04 a share, ahead of Wall Street's projected 90 cents (chart). Earnings for the June quarter are expected to come in at $1.30 a share, vs. 20 last year. Meanwhile, shipments of new ES/9000 mainframes have begun, without major glitches.

More visibly, the company has begun shipping OS/2, the software it hopes will win back at least some control of the personal computer business from Microsoft Corp.'s Windows package. IBM is making an all-out effort to push the software and says it has shipped 700,000 copies. That's about 300,000 more than had been expected, but far below the 10 million copies of Windows that have been sold.

Perhaps the most compelling sign of better earnings ahead: IBM has been inundated with employees signing up for its early-retirement package. Many believe this is the last such deal they'll get. After the offer ends on July 31, managers will likely be given authority to lay off employees as they please, says Soundview's Cohen, a former IBMer. Indeed, IBM's German subsidiary is already moving to cut ties to powerful labor unions, which have kept labor costs high (page 45). Altogether, IBM may well exceed Akers' goal to eliminate 20,000 jobs from its payroll of 344,000. More cuts--as many as 15,000 in 1993--are coming.

IBM does face some tough challenges. Analysts figure that, at best, its PC operation is barely profitable, even before reacting to price cuts in June by Compaq Computer Corp. and Dell Computer Corp. And Big Blue's core mainframe business is being hurt by a weak capital-spending cycle, says Stephen C. Dube, computer analyst at Sherwood Research Group.

MAINFRAME MALAISE. Customers, meanwhile, are consolidating their data centers to cut costs, reducing the number of mainframes and related software licenses IBM can sell. Indeed, market researcher Computer Intelligence Corp. last year found a 4% drop in the number of U.S. data centers and an 11% decline in installed processors.

What's likely to keep IBM earnings relatively strong and investors interested is Big Blue's all-out effort to cut costs. The company even mandated that all employees in Westchester County, N.Y., including those at IBM's Armonk headquarters, take a vacation during the July 4th week. Not exactly Hollywood material, but maybe a step in the right direction.John W. Verity in New York


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