Still Buy IBM

Also: Analysts' opinions on Electronic Data Systems and SBC Communications

IBM Corp. (IBM ): Reiterates 5 STARS (buy)

Analyst: Megan Graham-Hackett

According to a Wall Street Journal report, IBM should have fewer layoffs related to offshoring than originally expected. IBM indicated earlier in 2004 that this figure could equal 3,000 employees, about 1% of its workforce. Apparently, the reduction in layoffs is related to both political backlash against the trend of offshoring U.S. jobs as well as cost considerations. IBM suggested it is cheaper to re-purpose an existing employee than pay severance and hire a new worker. With the shares trading below our $121 12-month target price, based on our discounted cash-flow model, we would buy IBM.

Electronic Data Systems (EDS ): Reiterates 3 STARS (hold)

Analyst: Stephanie Crane

EDS posted a second-quarter loss per share of 3 cents, vs. earnings per share of 21 cents, in line with our estimate. Earnings on a GAAP basis reached 54 cents, vs. 18 cents. Revenue grew 4%, though sales from existing businesses were flat. Contract signings grew 25% to $4 billion on sales growth with existing accounts and solid renewals. EDS is also resolving issues with the Navy contract and its other commercial contracts. The company cut its dividend by two-thirds in an effort to save cash for productivity initiatives to get new contracts. We also view efforts to reduce net debt and increase cash flow as positive. We are keeping our 2004 earnings per share estimate of 25 cents, with 9 cents expected for the third quarter.

SBC Communications (SBC ): Reiterates 2 STARS (avoid)

Analyst: Todd Rosenbluth

SBC agreed to sell its 50% stake in directories operations in Illinois and part of Indiana to co-owner R.H. Donnelly (RHD ) for $1.5 billion in cash to help finance its pending wireless acquisition. We believe the sale of these relatively high operating margin operations will pressure earnings per share by one cent in each the next two quarters. We are cutting our 2004 operating earnings per share estimate to $1.42 (S&P Core Earnings of $1.18) from $1.44, largely reflecting pension adjustments. We would avoid SBC, which trades above its peers on multiple valuation metrics despite competitive pressures and lower-than-peer EBITDA margins.

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