Why Some Skeptics Are Zeroing in on IBM

The silence surrounding IBM (IBM Quote - Cramer on IBM - Stock Picks) is eerie, simply eerie. Here we are, two weeks before its Oct. 17 earnings announcement, and nobody, nobody, is even uttering IBM's name, other than to say something like, "I cannot believe how eerily silent it has been out of CEO Lou Gerstner. Not only is it eerily quiet out of IBM itself, but it's eerily quiet out of the analysts covering it." No ratings reaffirmation; no ratings rescission.

Not that IBM ever has gone overboard with preannouncements. Usually it has dealt with preannouncements the old-fashioned way, by quietly guiding analysts lower. There were still signs of that a month ago, as analysts were saying everything was fine and that they were still expecting 8% revenue growth. Then, as the euro got whacked, some analysts whacked their own revenue growth estimates back by a couple of percentage points. And that was the last anybody heard of anything related to IBM.

The silence was particularly noteworthy after Apple's (AAPL Quote - Cramer on AAPL - Stock Picks) blowup last week, when a possible miss at IBM wasn't mentioned by any analyst; instead, downgrades went to the likes of Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) and Gateway (GTW Quote - Cramer on GTW - Stock Picks). Yet IBM, to some skeptics, is as vulnerable if not more vulnerable than other companies to missing Wall Street estimates. "The most vulnerable company going out is IBM," says Fred Hickey, editor of the High-Tech Strategist newsletter. Hickey has been strongly skeptical of the PC industry in recent years, for which he has taken quite a bit of heat. (He was early, but turned out to be dead right, in his criticism of the PC and chip industries, mentioned here.)

Besides the euro, and a profound lack of sales growth, issues plaguing IBM now, he says, include the general slowdown in computer sales, a possible lag in sales of mainframes as customers wait for a new mainframe that is supposed to hit the market this quarter and the reality that despite expectations of 5% to 8% sales growth, IBM's top line was actually down second quarter from the same quarter a year ago.

Bulls are counting on IBM's service business to save the day (they cite big backlogs), but the skeptics don't buy it. Remember, IBM supports corporate America; no, with more than half its sales abroad, make that the corporate world. And the corporate world is in a world of pain, evidenced by the wave of preannouncements from companies ranging from DuPont (DD Quote - Cramer on DD - Stock Picks) and Eastman Kodak (EK Quote - Cramer on EK - Stock Picks) to Lexmark (LXK Quote - Cramer on LXK - Stock Picks) and Caterpillar (CAT Quote - Cramer on CAT - Stock Picks). Kodak, in fact, specifically said it plans to cut corporate spending, including technology. It's not alone. In its warning, Lexmark griped of "Slower than expected growth in the corporate market." The IBM skeptics don't think Big Blue can be immune from those cuts, even on the service side.

So, why has there been radio silence surrounding IBM? A spokeswoman declined comment, saying that the company is in its pre-earnings quiet period. (Like that has stopped companies before?) Reality could be that IBM itself doesn't know how it's doing because revenues have to be counted from all parts of the world. Or maybe for the first time, with new selective disclosure rules less than a month away, IBM has simply stopped offering guidance. With no more selective disclosure, "It's becoming less an expectations game and more a performance game," Hickey says. Apple, with nary a prewarning peep, showed how that game is being played.

Either way, what Wall Street had better hope is that history is not on the verge of repeating itself. The last time IBM's stock blew up was around this time last year, when the company made some not-so-encouraging comments about the fourth quarter and the first quarter during its third-quarter earnings conference call. Not a pretty sight if you look at the stock's chart. And that was back when they were offering guidance!

Attention, Class

From David Mullins, a math prof at a small liberal arts college in Florida: "As an interesting pricings comparison, I compared next year's estimated earnings for WorldCom (WCOM Quote - Cramer on WCOM - Stock Picks) (currently way out of favor, but until recently considered one of the best-managed companies, and certainly in an industry that over the long haul should grow), with Dell (DELL Quote - Cramer on DELL - Stock Picks), Intel (INTC Quote - Cramer on INTC - Stock Picks), Apple, Gateway and IBM. Assuming that these companies become as out of favor as WCOM (some probably have, or are heading toward, worse annual growth), one can give them the same PE , based on analysts' predictions of earnings, and get some interesting prices.

"WCOM has a 12.89 forward PE.

"That would value DELL at $15.73, INTC at $22.82, AAPL at $27.20, GTW at $29.52 IBM at $64.58."

Can't argue with the numbers (Gee! It looks like Apple's fairly valued here!), but that's not what you want to hear in a market as jittery as this one. (Disclosure, Mullins owns puts on IBM.)