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May 11, 2005 at 08:00 PM
May 5, 2005 — As a major component of the Dow Jones Industrial Average, the S&P 500, and various other equity indices, computer giant International Business Machines’ (IBM) actions impact many mutual funds, particularly large-cap growth and tech-oriented portfolios, and their shareholders. On the heels of a disappointing first-quarter earnings report and tepid demand growth in Europe, IBM announced it will slash 10,000 to 13,000 jobs, mostly in Europe, and take a related pre-tax charge of between $1.3-$1.7 billion in the second quarter. The job reductions will affect 3% to 4% of IBM’s global workforce.
Megan Graham-Hackett, computer hardware equity analyst for Standard & Poor’s, is reiterating her hold recommendation on IBM stock. This restructuring decision, she said, was not a “big surprise,” given that the company missed its estimates for first-quarter earnings, which IBM primarily attributed to weak performance in its European operations. “Attrition rates in Europe have lagged, and so their workforce there was somewhat bloated,” she said. “This was compounded by the fact that IT spending rates in Europe have also disappointed.”
Graham-Hackett noted that IBM said it expects to realize about $300-$500 million in cost savings from the workforce reductions and streamlining of operations. However, she expects “most” of these cost benefits not to show up until the fourth-quarter of the year. She has a 12-month price target of $87 for IBM (the stock currently trades at about $77); and her full fiscal 2005 earnings estimate remains at $4.64 per share.
