IBM and TI reported solid, but not spectacular, 3Q results but investors celebrated nonetheless.
October 18, 2004: 6:41 PM EDT
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) - Have investors finally learned to temper their enthusiasm for the tech sector? Based on the reaction to two third quarter reports from tech bellwethers Monday, that may appear to be the case.
IBM and Texas Instruments both reported better than expected third quarter earnings Monday. But investors had plenty of chances to nitpick if they wanted.
Contract signings for IBM, a key measure of the financial health of its massive services business, was slightly lower than expected. And Texas Instruments issued a forecast for fourth quarter sales that was below Wall Street's consensus estimate.
Nonetheless, both stocks surged after-hours. IBM (Research) shot up nearly 2.5 percent while TI (Research) soared more than 5 percent. That could set the stage for a nice tech rally on Tuesday as shares of several other large techs, including Intel, Microsoft, and Hewlett-Packard, also moved slightly higher in post-market trading.
So what gives? As was the case with Intel last week, it sounds like investors were preparing for Armageddon and were pleasantly surprised to find out the world wasn't actually coming to an end.
"Generally, tech is still healthy. People were getting irrational with expectations. Just because a company is a little light on sales or earnings doesn't mean the sector is doing badly," said Ted Parrish, co-manager of the Henssler Equity fund, which owns shares of IBM.
To that end, Richard Petersen, an analyst with Pacific Crest Securities, said that even though IBM's $10 billion in new services contracts signings was a bit below the guidance it gave when it announced second quarter results in July, he said that analysts were actually expecting the numbers to be even worse.
Petersen added that investors were probably happy to see continued strength in IBM's hardware division and a better-than-anticipated increase in sales from its software division. Hardware revenues were up 12 percent from a year ago, marking the fourth consecutive quarter of double-digit percentage growth in that business.
IBM's more profitable software segment reported a sales increase of 5 percent from a year earlier. Sales dipped slightly year-over-year in the second quarter, leading to some concerns about a software slowdown. So the increase in software sales during the third quarter could bode well not just for IBM but for other software companies as well.
What's more, IBM's chief financial officer Mark Loughridge said during a conference call with analysts that the company was continuing to see moderate improvement in customer spending. He added that the company was comfortable with Wall Street's consensus estimates for the fourth quarter.
As for Texas Instruments, a leading manufacturer of chips used in consumer electronics devices, the company said that inventory problems at customers and distributors would probably lead to lower than expected sales for the fourth quarter.
TI said it expects sales for the fourth quarter to be in a range of $2.96 billion to $3.2 billion for the quarter. The $3.08 billion mid-point of this range is below the consensus forecast of $3.21 billion.
However, TI's earnings guidance for the fourth quarter was in line with consensus estimates, a sign that any sales weakness may not be felt on the bottom line due to a strong focus on keeping costs down. The company said it expects earnings to be in a range of 24 cents to 28 cents a share. Analysts are expecting 26 cents a share for the fourth quarter.
In addition, TI appeared to do a decent job of managing its inventory levels in the third quarter, with inventory increasing just 5.6 percent sequentially, compared to a 12 percent increase in the second quarter.
During a conference call with analysts, Texas Instruments' chief financial officer Kevin March said that inventory levels at the end of the fourth quarter should be lower than the third quarter.
He added that about two-thirds of the inventory increase in the third quarter was on the wireless chip side due to expectations of strong sales of cell phones during the holiday shopping season in the fourth quarter. Along those lines, Nokia, TI's largest customer, raised its sales outlook for the fourth quarter last week.
Still, several analysts and fund managers have warned that the worst may not be over yet for chip stocks, as inventory problems may continue to have a negative impact on profit margins in the fourth quarter and beyond.
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