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IBM Results May Unveil Public Spending Fears

ARMONK, N.Y. ( TheStreet) -- Although one of the better performers in large-cap tech these days, IBM (IBM - Get Report), which reports second-quarter results after market close Monday, is likely to reveal clouds hanging over its federal business, which has broader implications for tech overall.

"Weak public sector demand could continue to impact its service business," wrote Drake Johnstone, an analyst at Davenport & Company, in a recent note. "There is potential risk that U.S. government spending on information technology could weaken in the near-term due to uncertainty surrounding the U.S. government debt limit and potential spending cuts."

Services account for around 60% of the 100 year-old tech bellwether's overall revenue.

Speaking during IBM's first-quarter call, CFO Mark Loughridge cited "difficulty" in the public sector. Weakness in this area impacts the company's global business services, he explained, but then added that this is not a "difference maker" in IBM's overall business. Investors should expect Loughridge to face questions on whether this is still the case following the company's results.

Implications for the Rest of Tech

Tech investors monitor Loughridge's public sector comments to weigh the impact on other big-name tech stocks.

Beleaguered networking giant Cisco (CSCO - Get Report), for example, gets about 20% of its revenue from the public sector, and has already noted a significant decline in government spending, both in the U.S. and overseas. PC maker Dell (DELL - Get Report) also felt the impact of public sector budget cuts in the U.S. and Western Europe during its recent second-quarter results. Dell gets around a quarter of its total revenue from the public sector, but saw this part of its business decline 2% year-over-year.

As for IBM, there is still plenty of positive sentiment surrounding the company's stock. Less flashy for investors than, say, Apple (AAPL), IBM has earned a reputation for solid growth thanks to its shift away from commodity hardware towards high-margin areas such as software and services. IBM surpassed Microsoft's market cap for the first time in 15 years earlier this year.

IBM's stock has risen more than 19% this year, which contrasts with HP (HPQ) and Microsoft (MSFT), whose shares have fallen 17% and 3.82%, respectively.

Even Apple's meteoric rise has slowed amid ongoing investor unease about the broader economy, gaining just over 14% this year, while shares of IBM's fierce database rival Oracle (ORCL - Get Report) have added just over 1% to their value.

"We believe that the IBM shares are a very good holding in uncertain times given the recurring nature of much of IBM's business," wrote Collins Stewart analyst Louis Miscioscia in a note, adding that recent strong results from services giant Accenture (ACN - Get Report) and Oracle (ORCL - Get Report) bode well for IBM.

"We see Accenture's results and overall industry trends as a positive read for IBM," added UBS analyst Maynard Um. "IBM is executing well in key growth initiatives like biz analytics, cloud computing, growth markets and smarter planet."

Analysts are looking for IBM to report second-quarter revenue of $25.35 billion and earnings of $3.03 a share after market close, up from $23.7 billion and $2.62 a share in the same period last year. Shares of IBM, however, have dropped following six of its last seven earnings reports.

IBM shares dipped $1.21, or 0.67%, to $174.33 on Monday as the Nasdaq dipped 1.15%.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

>To submit a news tip, send an email to: tips@thestreet.com.

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IBM $170.73 0.56%
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