No ‘smoking gun’ in IBM accounts

Shares in IBM rose 3.3% to $108.50 after the company released new accounting details that analysts said showed no ‘smoking gun’.

Instead, increased disclosure paints IBM’s financial position in a somewhat more positive light. IBM released its 2001 annual report, which disclosed details of pension income, sales of intellectual property and other items that had given investors some concern.

Merrill Lynch analyst Steven Milunovich said adding up ‘below the line factors’ results in a benefit to IBM’s pre-tax income of $1.3bn in 2001 compared to $2.1bn in 2000, supporting decent quality of earnings.

‘It appears IBM may dodge the accounting bullet,’ Milunovich said. ‘Still we remain neutral on the stock given weak near-term enterprise spending for all vendors and our concerns regarding IBM’s ability to grow services double-digit in the second half of 2002.’

He said a $350m decrease in 2002 pension income would be offset by elimination of amortisation, while intellectual property would continue to contribute more than $1bn of net income in 2002.

Milunovich concluded the increased disclosures were modestly beneficial.

In a research note, Robertson Stephens said operating expenses were higher than previously disclosed. IBM reclassified operating expenses so that total operating expenses in 2001 are 26.2% of sales compared to a prior disclosure of 23.8%.

Robertson Stephens analyst Eric Rothdeutsch said: ‘Relative to Compaq’s operating expenses at 19.8% of sales and HP’s at 21.4%, IBM’s no longer look quite as competitive.’

Some analysts, after reviewing the added information in IBM’s Form 10-K annual report, said it looked like the company’s operations were a bit stronger last year than initial data specified.

Lehman Bros analyst Dan Niles said the 10K report ‘is driving up the stock’.

Related reading