IBM's Second Chance

Leading into a crucial second-quarter earnings report after the bell Monday, shares of IBM(IBM) have broken out of their depressed state in the past couple of weeks, as once again investors raise their hopes for better things to come.

The company isn't expected to repeat the dour performance of the prior quarter, when it soundly missed its financial targets, plunging its shares to a two-year low, but IBM's overall progress in strengthening its services operations and in cutting costs will be keys to extending the stock's current momentum.

Shares are up 10% in July to $81.77, after bouncing between a range of $73 to $77 from mid-May through June. For the year, however, shares remain sacked -- off 17% from its starting level just under $100. The prospect of a rebound above triple digits is enticing, though, considering that an extended stay above the century mark hasn't happened since early 2002.

But for that to happen, investors will need signs of a sustained turnaround at the Armonk, N.Y.-based company, which has increasingly positioned its services division as the company's new hub. Consistent execution during the second half of the year, when business is traditionally strongest, will go a long way toward erasing the memory of the first-quarter stumble.

That misstep showed that IBM's transition from a hardware specialist to services company has been long in coming and not without difficulties. IBM blamed service contract deferrals, poor execution and a delayed product transition as reasons for its difficulties.

Mark Morris, head technology analyst at Nuveen Investment's NWQ Investment Management unit, which runs $34 billion in assets, says the transition is the right thing to do but that the services side of technology is an extremely competitive landscape.

"It makes sense that companies want to leverage their strengths, and clearly what IBM provides beyond hardware and software is the ability to put it all together," Morris says. "Customers are moving toward simplifying their lives."