Wall Street Sweetens View on IBM

Analysts upped forecasts on the tech giant after it reported double-digit earnings growth for the third quarter

IBM Corp.'s (IBM) share price jumped on Oct. 18, after the technology giant announced 4% higher third quarter revenue and stronger earnings.

Revenues surged from peddling such things as computer hardware, microelectronics, and software.

The Armonk (N.Y.)-based company said late Oct. 17 that its third quarter 2006 diluted earnings were $1.45 per share from continuing operations, an increase of 54% compared to the same period of 2005, when the company took a one-time charge of $525 million for taxes associated with the repatriation of foreign earnings. Without that charge, earnings per share grew 15% from $1.26 per diluted share during the same quarter last year. Total revenues for the third quarter amounted to $22.6 billion, up 4% from the third quarter of 2005 when adjusting for currency.

After the announcement investors bid up the stock nearly 5% to $91.25 per share in early trading Oct. 18 on the New York Stock Exchange.

Goldman Sachs analyst Laura Conigliaro raised her rating opinion on IBM to buy from neutral, and her higher earnings forecast for 2007 pushed up her twelve month target stock price to $100 from $92. "While we would prefer not to be upgrading IBM coming off its strong earnings report, we think the stock still has room, particularly in the current quarter and given the strength of software," Conigliaro wrote in a research note. (Goldman has received compensation for services rendered to IBM within the past 12 months.)

IBM's strength stemmed from improvements in many business lines, including the sale of programming that joins together separate computer programs, which is known as "middleware." Revenues from IBM's middleware brands, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.4 billion, up 12 percent versus the third quarter of 2005. Revenues from IBM's total software business were $4.4 billion, an increase of 7% compared with the third quarter of 2005.

But IBM did well in other areas too. Computer hardware revenues increased 8% to $5.6 billion in the third-quarter 2006 compared to $5.1 billion in the year-ago period, boosted by stronger revenues from IBM computer products such as the System z and System p UNIX servers, as well as microelectronics. On the weaker side, IBM's Global Services revenue, which includes businesses such as outsourcing and technology services, amounted to $12.0 billion in the third quarter, up 2% from the same quarter last year.

Citigroup analyst Richard Gardner raised his fourth quarter 2006, fiscal year 2007, and fiscal year 2008 earnings and revenue estimates on the stock, noting factors such as improvements in IBM's middleware software, microelectronics, and mainframe hardware businesses. He hiked his twelve month target price to $105 per share from $91. Citigroup's buy rating is based on factors such as the improving business outlook for information technology services, the stock's "attractive valuation," and IBM's lack of exposure to the intensely competitive PC and printer markets. (Citigroup has received compensation for services rendered to IBM within the past 12 months.)

"Our strong performance is the result of excellent execution and the repositioning of IBM's business model to capture the growth and profit areas of a rapidly changing IT industry," said Samuel J. Palmisano, IBM chairman, president and chief executive officer, in a press release Oct. 17.

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