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IBM's Charge, Job Cuts May Affect These Funds and ETFs

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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.

Howard Silverblatt, equity analyst at S&P, said IBM’s restructuring charge “will have about a $0.15/share impact on the as reported (GAAP) earnings for the S&P 500 for the second quarter, however I believe it will be excluded in the operating estimate figure.” He noted that the current second-quarter operating estimate for the index is about $18.46/share.

Fund Advisor screened for mutual funds with a significant portion of their assets invested in IBM. The following portfolios had at least a 4.0% stake in the stock as of Feb. 28, 2005. Exchange-traded funds (ETFs) dominate the list, notably iShares Dow Jones US Technology Sector Index Tr (IYW), with an 8.4% stake, and S&P Select Technology SPDR Fund (XLK), with 7.4% of its assets in IBM.


Percentage of Assets Invested In IBM (as of 2/28/05)

iShares Dow Jones US Technology Sector Index Tr (IYW)


S&P Select Technology SPDR Fund (XLK)


Gartmore Global Technology & Communications/A (GAGTX)


iShares Goldman Sachs Technology Index Tr (IGM)


DIAMONDS Trust,Series1 (DIA)


iShares S&P Global Technology Sector Index (IXN)


Integrity Equity Fund/A (IEQAX)


streetTRACKS Dow Jones Large-Cap Growth (ELG)


Contact Bob Keane with questions or comments at: .


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