Updated from 8:05 a.m. EDT
Warning that Street expectations on the stock remain too optimistic, Morgan Stanley knocked a dime off its 2002 and 2003 earnings estimates for
, citing potential deterioration on both its hardware and services sides. The brokerage also knocked down its estimate for overall personal computer sales in 2002.
In early afternoon trading the stock was down 1.1%, losing 86 cents to $76.28.
Morgan Stanley analyst Rebecca Runkle lowered IBM's 2002 estimate to $3.85 a share from $3.95 a share and its 2003 estimate to $4.35 from $4.45.
The consensus forecast of analysts surveyed by Thomson Financial/First Call is for 2002 earnings of $4.06 and 2003 earnings of $4.81. But in a research note, Runkle argued the Street's estimates are too high. "We continue to believe consensus expectations are unrealistic and eventually will trend toward the $3.80/$4.00/share range," she wrote.
Recent analyst comments on IBM have been
mixed, following the company's announcement June 4 that it would sell its money-losing hard-disk drive business and lay off 1,500 employees in a bid to cut costs. The company also said it would take a related charge of up to $2.5 billion in the quarter ending this month.
While some analysts have praised IBM for making tough decisions, others remain gloomy in light of the delayed recovery in IT spending. Last week one investment bank raised its 2002 earnings estimates for IBM, while another two cut estimates.
In its note today, Morgan Stanley echoed concerns about IT spending, pointing out that its survey of chief investment officers showed that hardware purchases remain a low priority. "Mainframes, IBM's historical strong suit, are ranked as the least important area of hardware spending this year," wrote Runkle, adding that the payment deferral plan the company began offering this quarter "suggests IBM is finding it tough to win new orders in the current environment."
Meanwhile, the lack of a pick-up in the services business could present a risk to IBM's results in the second half of '02, she said.
As a point of near-term concern, Runkle added that IBM's second quarter normalized earnings would be "difficult to calculate given all the one-time charges in the quarter," likely leading to a wide range of analyst estimates. Last year IBM's liberal accounting policies gave rise to grousing among investors, who complained the company was failing to declare the sale of assets as one-time gains and instead counting them as general revenues.
"We don't disagree with IBM's treatment of these charges, but we do believe it could cause confusion among IBM's investor base," said Runkle in today's note.
On the hardware front, Morgan Stanley also said it now expects 2002 PC unit sales to grow industry wide at a rate of negative 2% to positive 2%, down from a range of flat to up 5%. It cited weakening motherboard and CPU shipments and reduced software licenses over the last month. The brokerage warned that a lack of compelling programs could prevent a big upgrade cycle from materializing.
The downward revision in its sales forecast follows a similar move by Credit Suisse First Boston, which said last week that it now expects global computer sales
to remain flat for 2002.