Focus: I.B.M
>> analysts gathered in new york today to hear how i.b.m. plans to get the company back on track. chief executive sam palmisano said there would be bumps along the way as the company seeks to recover after first-quarter profit trailed estimates.
>> we heard i.b.m. has to be focused on fixing issues that caused them to miss the first quarter. it’s not going to be a quick solution but we think there is potential for them to get back on track.
>> joining us to talk about big blue is richard petersen of pacific crest securities, joining us from portland. i know you listened by webcast. were you satisfied that palmisano is addressing the problems the company faces?
>> yes, i think it was a positive analyst day. i.b.m. was unusually bullish, providing a range of things they were doing to smooth the bumps you heard about. some of the things range to practical things they can do all the way to conceptual things like tackling new markets but overall i think they did a great job in addressing that.
>> isn’t there a disconnect if the tone of the meeting was bullish but you you had the company come out with a big surprise that two investors of the quarter had missed and it cut jobs. how do you mesh the two?
>> one, i would say, in terms of the stock reaction today to what i perceive to be positive commentary from them during the analyst day, i think investors are in a wait-and-see mode in terms of the stock. in terms of surprising in q-1, i think that’s the reason they are in the show-me mode. they had an unusually weak report in hardware especially and also services bookings but today they explained what they’ll do to renew the growth and fix that. again, i think they did a pretty good job in addressing the issues that arose in the first quarter.
>> what are the things that stood out to you as most realistic to help the company turn around?
>> in services, they’ll cut about 8,000 jobs and use part of the cost reduction to invest in new technologies, enabling them to deliver services at lower costs and pass along the savings to customers in the form of lower prices. the second thing is, in hardware, they suffered market share gains around a product transition and failure to respond to competitive pricing and have made concrete changes that they detailed in the analyst day that will fix those so i think those are two examples of things they explained well and should work.
>> on the product front, are you talking about lowering prices?
>> on the services side, they did say they would lower the price of a lot of their services engagements and continue to focus on shorter term engagements with less risk for them. so, yeah, it’s on the services side.
>> on the services side, then, what effect will that have on profit grocket? growth?
>> the lower costs should enable them to maintain margins given the fact that they are cutting 8,000 jobs so i don’t think they’re planning to decrease margins but planning to pass along some of the savings from that cost cutting to their customers in the form of lower prices but at the same margin.
>> where do you think shares are headed from here?
>> i think they’re in a sideways mode for a while. it sounds like from the commentary they gave that business has improved, especially in the services side. they did talk about an improvement early in q-2. but i think what we’re seeing is just simply a resumption into a normal growth in i.t. spending so i think that until we get either positive evidence that some of these things are working because, again, i think investors are in a show-me mode with regard to the stock, or you get significant breakthrough in tech spending, i think the shares are largely sideways to slightly up over the foreseeable future. we rate the stock a sector perform.
>> i was going to ask, is it those two factors that you just identified that you would have to see before, in fact, you raised your rating again and i want to point out for our viewers that you had a buy rating on the stock until the earnings miss.
>> yeah, they are. we had actually reduced our estimates in front of the earnings report but we did have the stock at outperform and subsequent to the q-1 miss, the earnings growth looked like it was falling below 10% and there were a number of structural things they needed to fix. i think they’re working their way back but those are two things we would need to see to get more positive on the stock.
>> when you look at the landscape, who’s their biggest competitor right now? what’s the biggest threat as the company goes through so many changes?
>> the biggest competitor is almost itself, its own size. it spans three different divisions competing against thousands of companies, literally. it’s so big at this point that it needs to figure out different ways to bring solutions to market and that, i think, is the principal impediment. it’s no one single competitor. in hardware, they did lose share to e.m.c. and hewlett-packard. it looks like a cyclical trend. on the services side, they have a number of large competitors but as a whole there are few companies that can compete directly with the breadth of what i.b.m. is doing so i think their challenge is to figure out ways to grow, being as big as they are.
>> richard, thanks for joining us.
>> thank you.
>> richard petersen of pacific crest securities. after a break, a long shot and a little luck. mike buteau explains why betters will look to strike it big this weekend at the preakness. “money & sports” coming up.
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Listen Market briefing --- Ellen (slow)
Maytag --- June (slow)
Taking stock --- Edward (slow)
leading that decline of .2%. the s&p also sending lower, seven of 10 broad economic groups that make up the index trading down. the nasdaq was higher, .2%. shares of qualcomm and intel leading that advance. however, when it comes to the week, you had the biggest weekly gains in six months. this was a slide in oil prices, optimism about the economy boosting the index -- soaring today were shares of maytag, the third largest u.s. appliance maker bought by a group of investors led by buyout firm ripplewood holdings. june grasso has more on the story and certainly a day to be a maytag shareholder.
>> absolutely. those shares ended up as high as 57% above the buyout price. they jumped that high today. suggesting investors expect another buyout firm to make a rival higher bid.
>> i’m happy today but i don’t think the bid is anywhere near what maytag is worth. i’d like to see something in the order of 18 or 19 and i think that’s fair value so we hope the bidding war ends soon and the stock goes higher.
>> ripplewood, goldman sachs and rothschild group say they will pay $1.13 billion for the appliance maker and assume $975 million of debt. maytag shares have fallen for six straight years and were down 45% this year. maytag makes aymana and admiral appliances and hoover vacuum cleaners. rivals, including whirlpool and general electric, are more profitable with lower cost operations in china and mexico. much of maytag’s manufacturing is in the united states and part of the turnaround plan involves moving more factory work overseas. merger analyst steve bern around says there has been several deals involving private equity firms buying companies with good brand names that have not performed well in the market like maytag.
>> private equity firms have an estimated $90 to $100 billion of committed capital that needs to be invested and there’s a lot of attractive bargains in the market .% a lot of the take-privates that they’ve done lately have involved companies with good brand names but have not done well in the market for financial reasons.
>> analysts say turning around maytag could take years. newer designs from europe’s siemens and asian manufacturers like samsung and l.g. electronics have given them the lead. best buy stopped sell maytag washers, dreyers and ranges in january and home depot said it would carry l.g. products. back to you.
>> thanks so much for those interesting moves taking companies private. turning our focus to the economy. one of alan greenspan’s colleague says america’s central bank needs better inflation forecasting. fed governor donald kohn says 1/3 of the forecasts over a 16-year span were off by more than .5%, more often too high. in a speech given in europe today, kohn says the methods for predicting inflation have changed little over the past 35 years and he is telling his audience economists failed to spot disinflation in 2003 and the rise in core inflation the following two years caught many, including him, off guard. it is speculation that the fed is close to ending interest rate increases that could fuel a gain in stocks. joining us with more on the story is bloomberg news reporter edward ortega taking stock this week in “taking stock.” let’s start with what you hear from investors? in terms of speculation and what would happen if and when the fed stops.
>> investors have varying opinions on this. we spoke to charles schwab investment strategist who says perhaps the fed will be done as early as its next meeting in june. other investors suggest perhaps they might be done as late as november when the fed funds rate might be around 4%. earlier this week, there was a survey by merrill lynch looking at opinions from fund managers and they put it at 3.8, 3.7. so it looks like maybe four more rate increases, maybe three. but decide all that―despite all that disagreement, there is consincere that once the fed signals it’s done, the market might be able to rally so it looks like the rebound we’ve had in the past month --
>> why would that be the start signal for a rally?
>> well, this week we’ve heard from folks that were already starting to anticipate some of that but people say that once the fed is out of the way, we might have some asurance that we won’t continue to face the threat of the economy slowing down and so equity prices might be lifted by fact that we have one less concern hanging over it.
>> what does history show, what’s happened in the past when the fed has gotten toward the end of the interest rate cycle?
>> it’s a mixed history. the past three cycles under greenspan, the market has rallied strongly twice and been flat once. before greenspan, the historical record shows the market has really taken the fed tightening poorly, declining nine of the past 16 cycles and this is data we got from ned dasts research that tracked interest rates, a series of interest rate increases from 1920 to now so at least the track record on the greenspan era is positive but we get mexed signals in―mixed signals in earlier decades. investors we talked to suggest greenspan has been more talkative and transparent in leading the fed and that that has allowed the market to take these things in stride.
>> thanks so much. have a great weekend. that was edgar ortega from our stocks team with our weekly look at “taking stock.” when we return, i.b.m. held an analysts meeting in new york today. we’ll have an overview of big blue and be joined by pacific crest securities analyst richard petersen.
