Investors are saying

IBM's

(IBM) - Get Report

apparently robust earnings aren't all they seem.

The company yesterday beat analysts' estimates by earning $2.35 billion, or $2.47 a share, for its fourth quarter ended Dec. 31. But analysts say weak performances at a number of units and a few gimmicks that bolstered the bottom line have momentarily soured Wall Street on the stock. At midday Friday IBM was off 14 7/16, or 7.3%, at 182 9/16.

Merrill Lynch's

Steven Milunovich says the stock is down significantly because the Street was expecting a great quarter and it only got a good one. (His firm, which has a buy rating on the stock, has done no recent IBM underwriting.) Revenue rose just 6% from a year ago, substantially lagging the Armonk, N.Y., firm's 17% earnings-per-share growth.

Another reason, adds Jim Poyner of

CIBC Oppenheimer

, is that hardware revenue came in a bit light, hurting gross margins. Margins fell to 39% from 40.1% in last year's fourth quarter. "That was a little lower than we were expecting," Poyner explains.

Reading between the lines, investors will also find the quarter's gains are attributable partly to favorable currency rates and an aggressive buyback program. Discounting those factors, Big Blue would have earned around $2.39 a share, missing estimates by 6 cents. Add to the mix a better-than-expected tax rate and IBM's earnings no longer look so robust.

At last night's conference call with analysts, IBM officials talked about the company's powerful services division, for which revenue expanded 20% from a year ago and which now makes up 28% of overall revenue. But the services division seems to be the only real jewel: The struggling hardware division, which generated $11.3 billion in sales and makes up 45% of total revenue, saw sales decline 2% from a year ago. Maintenance sales slipped 3%, even though IBM released a new mainframe product, the System/390, in the third quarter. While shipments of the product were strong, price cuts weighed on revenue. "That was the hidden key to this quarter," says Poyner, whose firm has done no underwriting for IBM.

IBM's earnings growth has been called into question before. In the fourth quarter, IBM spent around $1.6 billion on share repurchases, slashing total shares outstanding by year's end to 916 million from 928 million at the start of the period, according to

Securities and Exchange Commission

documents. The buyback boosted earnings per share by 4 cents by reducing the number of shares outstanding. Since 1995, the company has bought in excess of 200 million shares from shareholders.

Of course, Wall Street loves a good buyback program, but it's how the plan affects the quality of earnings that should concern investors. And management also noted during last night's conference call that a weaker dollar added an additional 4 cents to earnings. Thus, accounting for the currency benefit and smaller share base, IBM's $2.47 figure translates into $2.39.

Another area of concern is how IBM has reduced its tax rate in the past three years. In 1996, IBM's tax rate was 40.3%. By the end of 1997, it fell to 33.5% and at the start of 1999 it had dropped to 28.9%. Lower taxes, more profits.

Poyner, one of the few Wall Street analysts with a hold rating on the stock, thought the company would have shown a 31% tax rate for the quarter and earn $2.41 per share. "The tax rate is what made me miss," the analyst says, though he says that isn't a major negative. Of the buyback program, he says it has long been a part of IBM's strategy.

IBM has learnt the Wall Street game all too well. But to show faster profit growth, it seems the company is relying on deft accounting as well as innovation. Expect more share buybacks especially as hardware sales continue to decline. After all, the more shares the company buys back, the better earnings will look.