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JAMES FLANIGAN

IBM Still Great, but No Longer a Sure Thing

September 30, 1987|JAMES FLANIGAN

What's wrong with IBM? The stock price fell more than $3 Monday and tumbled an additional $2.25 to just over $150 a share Tuesday. It is now down more than $25 from its high for the year--in marked contrast with other computer stocks such as Apple, Digital Equipment and Compaq, which are flying high.

What's the matter? IBM has problems--most of them minor, one potentially serious. It remains one of the world's great companies and will undoubtedly work its way out of its difficulties, but meanwhile it is causing anxiety in the stock market.

One immediate problem has less to do with IBM than with its institutional stockholders and their advisers. The stock is falling currently because traders and security analysts are nervous about IBM's third-quarter earnings, which are due to be released in two weeks. Analysts are hoping that the company reports $2 a share, supporting their predictions of an earnings increase for all of 1987, after two years of declining profits.

It may seem silly that billions of dollars in the market value of the world's largest computer company should hang on a single quarter's profit figure. But IBM creates anxiety on Wall Street because it is the security most widely held by pension funds, owners of more than half of its 603 million shares. That means the jobs of a lot of money managers and security analysts depend on their betting right on IBM. Earlier this year, the analysts had optimistic projections for IBM, and the stock rose to $175. Now they are backing off those predictions, and the stock has declined.

Stiff PC Competition

The stock is weak for other reasons, too. For one thing, the business has changed. Where IBM was once thought to have no competition--and was sued by the Justice Department on antitrust grounds--now it has undeniable competition. Digital Equipment is picking off IBM customers with its new VAX computers; AT&T and Unisys are luring some away. The research firm Dataquest shows a decline in IBM's share of market last year in a couple of categories of large business computers.

At the smaller, personal computer level--notwithstanding that IBM's most successful new product is the Personal System/2--both Apple and Compaq are giving IBM more competition than it has been used to.

Then there is the relatively new phenomenon of the used computer market--meaning used IBM computers selling at attractive prices and curbing some customers' purchases of new IBM machines. At the barn-like showroom of Comdisco, a computer leasing company near Chicago's O'Hare Airport, customers can buy used models of the powerful computers that preceded the line IBM is currently selling, for $1 million to $2 million apiece--or half the price of IBM's new models.

Customer Complaints

Such problems are unlikely to stop IBM for long, though. The company has new products coming out next year, and its sales--stalled at around $50 billion since 1985--are likely to grow again, says analyst Steven Cohen of the Gartner Group, a research firm founded by a former IBM employee. Analyst Michael Geran of E. F. Hutton is predicting $10.75 a share earnings for 1988, and George Elling of Oppenheimer & Co. looks for the same range, $10.50 to $11 a share--up from an estimated $8.75 this year and $7.81 last year.

So much for the minor problems. IBM's customers are another matter. Many are complaining about the aggressive marketing push that they are getting from IBM since the computer business changed to selling machines rather than renting them. IBM planned on a higher level of sales than has materialized, and this has left its executives pressured to make quotas and the company overstaffed. IBM doesn't lay off its employees, but it has pushed some people into early retirement and put other office personnel into the field to help with sales. The trouble is, said the computer director of one mid-sized company, the new people don't know enough about the equipment they're supposed to sell. At a recent group session held in Chicago, 10 IBM customers sounded off about IBM's sales force--once the company's strongest asset.

Customer discontent is not defection. IBM's customers are corporations with computer operations that are crucial and expensive--costing hundreds of millions. It is not easy to replace an IBM system with one from Digital or AT&T. Furthermore, said one computer director: "Other companies can do some things for you, but there is still only one company that can do it all."

But IBM must watch it. Angry customers invite competitors to make bids. And ultimately, competitors who can "do it all" will arise--possibly from Japan where even now Fujitsu, NEC and Hitachi have dropped IBM to fourth place in a market where it used to be first.

Why is IBM's stock down? Because it's no longer a sure thing.

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