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November 18, 1993

OPINIONS DIVERGE OVER IBM PROSPECTS

By CBR Staff Writer

It takes many views to make a market, and perceptions of IBM Corp are beginning to diverge wildly as Merrill Lynch & Co analyst Daniel Mandresh raised his long-term investment rating to Buy from Above Average, citing the potential of the PowerPC chip, adding that he is comfortable with his fourth-quarter earnings estimate of 52 cents a share for IBM; over at PaineWebber Inc however, Stephen Smith is a lot less sanguine, highlighting the area that seems to us to be IBM’s biggest triumph of hope over experience – services: he points out that IBM’s gross margin on services is a slim 13%, and sees pressure on margins in this area, and in maintenance and software; he notes that while IBM will still have general, selling and administrative expenses of $15,000m to $16,000m to cover next year, as well as $5,000m in research and development, and does not think the company can show earnings per share anything near the $4 to $5 indicated by the current share price; he adds that a mere three percentage point in gross margin means IBM loses money, and on services quotes even the company’s own chief financial officer saying that Integrated Systems Solutions Co making it clear that the cost structure here is unacceptable and that IBM must stop pulling so hard on the growth lever and start pulling on the profit lever.

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