Tuesday, 15 January 2008

IBM Produces The Unexpected

A couple of days ago I talked expecting the unexpected, both positive and negative. Yesterday IBM came out with the positive, from marketwatch.com:

IBM expects profit to easily top forecasts

International Business Machines Corp. delivered a surprise Monday, saying fourth-quarter earnings for the information-technology giant will easily exceed Wall Street's estimates and touching off a buying spree in Big Blue shares and across the tech sector.

...the company (IBM) said it expects to earn $2.80 a share from continuing operations, up from $2.26 a share in the year-ago fourth quarter. Revenue will grow 10% to $28.9 billion, the Armonk, N.Y.-based company said.

Analysts polled by Thomson Financial have, on average, been expecting the Dow Jones Industrial Average component to earn $2.60 a share on revenue of $27.82 billion.

"The broad scope of IBM's global business -- led by strong operational performance in Asia, Europe and emerging countries -- drove these outstanding results," said Samuel Palmisano, IBM's chief executive, in a statement.

IBM said it would release more details on Thursday, when the company plans to formally announce fourth-quarter results.

Analysts, however, sounded a more cautious note, crediting IBM with a strong performance but urging caution in terms of drawing more general conclusions from the results.

"The million-dollar debate remains [whether] 2008 tech trends weakening, and if so by how much," said Louis Miscioscia of Cowen & Co.

"While it's impressive that IBM's quarter did hit and overachieve our and the Street's estimates, we maintain our neutral rating at this time, given the uncertainties for 2008 with respect to tech spending," he wrote clients.

The details of IBM's 4Q07 report on Thursday will be interesting, particularly with respect to how much the weak dollar helped earnings. On the negative side but not totally unexpected Sears pre-announced a larger than expected decline in 4Q07 earnings. From marketwatch.com

Sears Holdings sees big profit shortfall

Sears Holdings Corp. shares fell 6% in midday trading Monday after the retailer warned that fourth-quarter earnings per share may fall as much as 51% from last year's levels.

Sears Holdings (SHLD) warned it's expecting earnings to fall between $2.59 and $3.48 a share for the three months ending Feb. 2, compared with last year's $5.33 a share.

Analysts polled by Thomson Financial have been expecting fourth-quarter earnings of $4.43 a share, on average.

The stock fell $6.42 to $89.75, eclipsing its earlier 52-week low of $90.80 a share. It's also the first time since early 2005 that the stock has fallen below $90. Downgrades came from Credit Suisse and Goldman Sachs, who cut the stock to sell.

The decline comes after a drop in holiday-season sales for both the company's Sears and Kmart chains. For the nine-week period ended Jan. 5, Sears' domestic same-store sales fell by 2.8% and Kmart's same-store sales dropped by 4.2%.

"Kmart has been crushed by Wal-Mart," said Craig Johnson, president of consulting firm Customer Growth Partners. "It's not a well-managed retailer...

..."We believe that comparable-store sales results reflect increased competition and the negative impact of unfavorable economic conditions, such as a weak housing market and consumer credit concerns," Sears said.

The Sears news was awful but IBM won the day as the market was desperately seeking a catalyst to rally from oversold conditions. To finish this post off it is only fitting to take a look at the effect the unexpected had on one analysts view of Sears, from the same marketwatch story;

Gary Balter, analyst at Credit Suisse, said his previous buy recommendation on Sears was based on the company's free cash flow and asset value.

Now, "over the past few months, we believe the largest piece of that value, real estate, has declined materially, with other pieces including brand value also losing a substantial part of their value in this market," Balter wrote in a note to clients.

He cut his stock price-target to $70, from $150.
This is embarrassing, I hope the dealing desk gives this analyst heaps for what is just a horribly wrong and behind the curve call. Hopefully he didn't convince anyone to buy Sears in recent months.