IBM raises outlook, but investors are wary

IBM raised its 2010 profit target and reported a stronger-than-expected, 9 percent increase in fourth-quarter earnings, as cost cuts and a shift to more profitable contracts helped it weather a slump in corporate spending.

IBM’s share price fell 2 percent after the results, however, as the results failed to encourage more buying in the shares which already rallied nearly 60 percent in the past year.

Some analysts said International Business Machines Corp had set a high bar for itself, noting that the world’s leading technology services company has not missed earnings estimates since 2005.

“I think there were some pretty big expectations built in, and you really needed to wow it,” Stephen Massocca, managing director at Wedbush Morgan, said after the results were issued on Tuesday.

Ted Parrish, co-portfolio manager at Henssler Equity Fund, added: “While I think the long-term prospects for the company are good, I think the shares are a bit frothy, not overvalued but I would say the stock isn’t going to do as well as it did in 2009.”

While IBM’s results failed to excite Wall Street, they added to evidence that corporate technology spending is recovering, coming just days after another technology powerhouse, Intel Corp, posted results that topped expectations.

The strong numbers also show IBM’s efforts to cut costs and shift from commoditized hardware to services and software businesses are paying dividends, analysts said.

Today, it is the world’s largest IT services company, providing technology outsourcing, automation and support. Such contracts have not only helped boost IBM’s profitability, but they have also helped shelter the company from the worst of the global economic crisis.

IBM said it now expects profit of at least $11 a share in 2010 compared with its previous target of $10 to $11 per share.

IBM’s fourth-quarter profit rose 9 percent to $4.8 billion, or $3.59 a share, from $4.4 billion, or $3.27 a share, a year earlier. Analysts on average had expected a profit of $3.47 per share, according to Thomson Reuters I/B/E/S.

Quarterly revenue rose 1 percent to $27.2 billion, surpassing estimates, and IBM forecast more revenue growth in the first quarter.

Analysts said they were particularly impressed, if not surprised, by the quarterly gross profit margin of 48.3 percent, up 0.4 points, in the quarter.

“IBM is just a machine. Throughout the downturn, they have provided consistent results and this is no different,” said Andy Miedler, an analyst with Edward Jones.

Shares of IBM fell 2 percent after ending regular trading at $134.14, up $2.36, on the New York Stock Exchange.

Some analysts said the long-term outlook for the company was still solid and that the shares could resume their gains if the global economic recovery turns out stronger than expected.

“There is far more for the global economy to go and there is a significant amount of acceleration that is going on in the global economy, and IBM will be a beneficiary of that,” said Peter Misek, an analyst with Canaccord Adams.

Many said strength in services contracts was a good indication of a sustainable recovery. Such contracts totaled $18.8 billion in the fourth quarter, an increase of 9 percent. IBM said that included 22 contracts worth more than $100 million.

“The breadth and the depth of IBM’s improvements suggests that Big Blue is leading the industry out of the recession,” said Annex Research analyst Bob Djurdjevic. “Big Blue is doing it by restoring trust and confidence of investors that a company can deliver on its promises quarter after quarter, year after year.”

Source: Reuters

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