IBM

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shares suffered an unusually steep drop a day after

EDS

(EDS)

, a rival in computer services, said it

would miss third-quarter earnings by a long shot.

In early afternoon trading, IBM had surrendered $3.55, or 5.1%, to $66, while EDS had seen its value cut nearly in half. EDS dropped $17.26, or 47.3%, to $19.20.

Rumors have recently circulated that IBM might be forced to trim its outlook for the quarter that's under way, given the extent of warnings in the tech sector. Though that hasn't happened yet, this morning a number of Wall Street analysts responded to the EDS news by summarily chopping their IBM forecasts for the third quarter and into next year.

Just as painful, a report from J.P. Morgan today pegged the stock's value a year from now at $60, or 14% below yesterday's close of $69.55. J.P. Morgan has done banking for IBM within the past 12 months.

For the near term, investors' biggest concerns center on potential troubles in IBM's $35 billion global services arm, which accounts for around 40% of revenue and roughly half of pretax profits. Last quarter the division missed its goal of landing up to $15 billion in new services contracts, signing only $10.6 billion. The company predicted in July that global services would see only modest growth in the second half of 2002, saying customers had grown cautious about spending.

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Shortly before the quarter's end, the EDS news underscores that the situation, to say the least, hasn't improved. "While some of the shortfall at EDS is related to EDS-specific issues, the demand environment remains tough, with continued hesitance on part of company CEOs/CIOs and lengthening sales cycles, which adds further risk to IBM's earnings outlook," said Bear Stearns analyst Andrew Neff in a research note. "We are increasingly cautious about IBM's September quarter results, given the slow pace of services signings announcements, continued soft IT spending levels and aggressive pricing environment." The pace of contract signings has been unusually slow, he said, with only six announced so far. Bear Stearns has done banking for IBM.

A note at Morgan Stanley pointed out that not only have published signings dropped below usual levels, but the size of contracts has also shrunk. Morgan has done recent banking for IBM.

On the hardware side, too, the outlook isn't promising. J.P. Morgan analyst Bill Shope points to

Celestica's

(CLS) - Get Celestica Inc. Report

announcement yesterday that its quarterly sales and revenue would come up short, due to weaker-than-expected orders from some of its biggest customers. The contract manufacturer for electronic goods is estimated to draw some 15%-20% of revenue from IBM. "We believe that IBM may have been a significant contributor to the miss," wrote Shope, who has a market perform rating on the stock. "IBM is one of Celestica's largest customers in Europe, which was Celestica's weakest region."

Shope said his downward revisions in the top-line outlook for IBM are based on weakness in both services and hardware. He now expects third-quarter revenue of $19.7 billion and EPS of 94 cents, down from earlier estimates of $20.1 billion and 97 cents.

Wall Street is looking for sales to eke out a 1.4% gain to $19.9 billion, on EPS of 98 cents per share.

Shope also cut his 2003 revenue estimates for IBM to $82.4 billion, down from $85.6 billion, and earnings to $4.34, from $4.52.

Analysts currently expect the company to post sales of $85.1 billion and to post a profit of $4.53 next year.

IBM is scheduled to report earnings on Oct. 16.