Strategy

As IBM Goes…? One Can Hope

After six big hits to the Dow Jones, Big Blue's earnings news and outlook cheer what's been a pretty cheerless market. But some other factors, too,...
Roy HarrisOctober 9, 2008

What the Fed’s rate cuts and bailouts couldn’t do, International Business Machines Corp. did — at least to start Thursday — as the upbeat analysis of its third-quarter earnings statement gave investors some respite from the persistent gloom.

The ironic backdrop of a Dow Jones Industrial Average that hit its record high mark exactly one year ago today may be making today’s DJIA progress a bit symbolic. The starting level of 9258.10 — after six consecutive days of sharp losses — was off 35 percent from that year-ago peak level of 14164.53.

But Big Blue not only posted a 20-percent rise in net income yesterday, to $2.8 billion, or $2.05 a share on a fully diluted basis, but it held to its full-year projection of 22-percent earnings growth. It also noted that its profit margin had widened to 43.3 percent form 41.3 percent a year ago.

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It had free cash flow of about $6.4 billion at quarter’s end, and a cash balance of $9.8 billion.

Samuel Palmisano, its chairman, president, and CEO, credited “the combination of a steady base of recurring revenue and profits, investments for growth in emerging markets, a range of products and services that deliver value to clients, and a strong and flexible financial foundation.” Those factors, he added, “give IBM a competitive edge in good times and tough times.”

Bloomberg News saw early signs that stock indexes could rebound after the six-day southward plunge. It noted a general feeling that investors had been overreacting to fears that the steps by the U.S. and other governments were not providing sufficient early remedies. The news service noted that Treasury Secretary Henry Paulson, while suggesting that there might be more bank failures, also said that the U.S. might make direct investments in banks as a next step in alleviating the credit crisis.

After giving up 189 points on Wednesday, the blue-chip stocks of the Dow did open higher today — regaining 145.93 in the first half-hour of trading. Still, by mid-morning the Dow was back in negative territory as a day of some fluctuation appeared to be developing. In explaining why the downward slide hadn’t continued early-on, market-watchers saw more factors than just good news from IBM.

“I think the base driver today is that we’re oversold,” Arthur Hogan, chief market analyst at Jefferies & Co., told the Associated Press. “You can’t do that too long before things turn around, and I think the bottom of this market gets put in this week.”

In addition to Secretary Paulson’s hints about helping the banks, the U.S. government agreed to expand its rescue of American International Group Inc., adding another $37.8 billion in lending to the $85 billion that AIG received last month. Further, the government reported that applications for unemployment benefits had dropped last week from a seven-year high, although claimsremain at elevated levels.

Of course, what one leading company’s surprisingly good earnings can accomplish, another’s weaker-than-expected earnings can undo just as quickly. Next up: General Electric Co. which in late September projected that it will report third-quarter earnings of 43 to 48 cents a share tomorrow — off more than 10 percent — because of this year’s reversal in global finances.