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February 25, 1987


By CBR Staff Writer

Gartner Group’s Stephen Cohen is recommending IBM shares as a buy at current prices, and we now have the bones of his argument. He is seeing clients this week and putting forward the thesis that all the bad news about the company is now out, and investors can start looking forward to better year-on-year earnings comparisons in the second half of 1987. He is not reckless enough to predict that the obstinately sluggish demand for hardware will suddenly pick up, but he looks for IBM’s growth to be driven by its service business, which he characterises as less competitive and less capital-intensive than hardware, and by its software operations. Getting down to numbers, Cohen is going for a meagre dollar even a share for the first quarter, rising to $1.90 in the second quarter – but in the third quarter of 1987 he sees IBM reporting its first up quarter since the fourth quarter of 1985, when he looks for a 16% rise on the 1986 figure to $2.05 a share. And in the fourth quarter, when 9370 shipments should really start feeding through to the bottom line, he looks for a rise of 38% on the 1987 fourth quarter at $3.55 a share to produce $8.50; that would compare with the $7.81 a share $4,800m – IBM reported for all of 1986.

By no means alone

Cohen is by no means alone in recommending IBM – Peter Labe of Drexel Burnham Lambert reckons that cost cutting measures are poised to get their reward, and Michael Geran of E F Hutton recommends the company and likes last week’s increase in rental, software and maintenance charges (CI No 626). IBM shares on Tuesday were surprisingly unimpressed by the company’s announcement that it planned to buy in another 4m of them, falling $0.25 to $143 even. There are two causes for caution about the renewed optimism over IBM: the first is the simple one that 9370 shipments have not come forward nearly as far as many had expected, and volume deliveries are not now forecast to start before June, where IBM had originally indicated August. Many commentators had looked for volume at least six weeks earlier than that. The second note of caution is more impressionistic. It relates to the apparent belief that IBM can raise maintenance and software licence charges indefinitely with impunity. On the maintenance side, although there is not yet a strong market in the US in third party maintenance of IBM shops, the arrival of determined Europeans like DPCE Plc on the US market, coupled with a widespread upsurge in third party maintenance business in general is creating an environment where one of the cheapest ways to cut one’s data processing budget quickly is to cancel one’s IBM maintenance contract and call in a third party – a move particularly attractive to shops that already buy some of their peripherals or CPUs from IBMulators. As for the endless bleeding of the customer on software licences, our US sources insist that this is a rapidly growing cause of deep resentment among IBM customers who feel that the company is taking unfair advantage of the fact that they are locked in. By recognising this resentment and addressing it intelligently and generously, DEC and the Unix vendors are in an enviably strong position to capitalise on what is not yet widely recognised as being a potentially crucial vulnerability for IBM.

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