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IBM Analysts Goofy Over Gerstner

Wall Street may want to take another look at Big Blue's second half before proclaiming Gerstner king.

It's official: Wall Street loves


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CEO Lou Gerstner.

After Gerstner cavorted with money managers and sell-side analysts Wednesday evening, IBM's stock was up as much as 17 points, or 8%, Thursday morning in heavy trading. Analysts were literally racing to the phones to up their firm's price targets, says one money manager, who attended the New York City analyst meeting Wednesday. This afternoon, IBM shares were changing hands 15 5/8 higher at 241 1/8.

"For a guy who didn't know a thing about computers when he got to IBM six years ago, it's amazing how he has become this tech god to the Street," says the manager, who requested anonymity.

Analyst reports Thursday read as if Gerstner were the main attraction in a feature film. "Gerstner the Great," was the headline of the

Merrill Lynch

report from Steven Milunovich, who bumped his IBM price target from $240 to $270 and equated Big Blue's CEO to the retiring Great One,

Wayne Gretzky

. Even skeptic Don Young from


led with: "IBM=Internet Business Machine."

Part of the reason for all this euphoria is Gerstner said that 25%, or $20 billion, of the company's annual revenue is now coming from the Internet, or as every quasi-Internet company like to calls it, "e-business." Merrill Lynch and PaineWebber have done no recent IBM underwriting.

As IBM's stock price escalates into the e-stratosphere, however, it's worth noting that analysts often become overexcited about a tech company's prospects. When

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discussed its e-business outlook in January, for example, a number of top analysts took the bait and bumped up earnings and price targets. Just months later, the company is treading water after key executives, including its CEO and CFO, headed out of the door.

For IBM, the rosy outlook means the Street now expects significantly higher growth rates. Earnings estimates for 1999 already have ramped to $7.71 a share from $7.52. It is worth noting that


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, another hardware company that is benefiting greatly from its e-commerce activities, is showing 20%-plus annual revenue growth. By comparison, IBM's revenue only grew 4% last year.

Gerstner said recent revenue acceleration will allow Big Blue to grow revenue at 10% or better going forward. Only three weeks ago, IBM wowed the Street with its first-quarter results that showed a 15% year-over-year revenue growth. But analysts seem to be forgetting that IBM had incredibly easy year-over-year comparisons thanks to the Asian Contagion and horrible PC sales in early 1998. (IBM confessed in its 1998 annual report that its PC division lost $1 billion last year.)

"Wall Street is in LOVE with Gerstner, but the bottom line is, IBM is not generating CASH," wrote Gruntal analyst David Takata in an email from the


conference in Las Vegas. Most of IBM's installed base has already upgraded to the "G" series mainframe, he says, adding that sales of workstations and servers using Windows NT is growing much faster than mainframes. "IBM is a good company. Is it at the top of my buy list? NO." Takata has a hold rating on IBM. His firm has done no IBM underwriting.

Gary Helmig, hardware analyst with

Soundview Technology Group

, says that IBM's third quarter is the one quarter in 1999 that will have tough year-over-year comparisons -- and the one quarter that could be a problem. "I'm worried that earnings estimates may be coming up too much," says Helmig, who raised his own 1999 numbers to $7.60 a share. Helmig, who nevertheless has a buy rating on the stock, believes Y2K problems may still have an impact in the second half of the year.

Surveys done by Soundview show that one-third of all mainframe makers will have a lockdown, or a sustained malfunction, on the deployment of new systems. If IBM were hit even minimally by this, it could hurt the stock, says Helmig, especially considering how expectations have grown so much this year. "We are seeing that IBM and others could get hit in the August-to-October time frame," says Helmig, whose firm has done no IBM underwriting.

Gerstner is bullish on the company's prospects through 2000. But IBM needs to execute perfectly to make sure that this love affair lasts beyond this spring.