The Dow Jones Industrial Average soared 171.85 points today, thanks to strong earnings guidance from companies like IBM. The technology giant expects profit to have risen at an annualized pace of 24 percent in 2007. In a preliminary report, they announced a quarterly profit of $2.80 per share on revenues of $28.9 billion; that compares to analysts’ predictions of $2.60 per share with sales of $27.82 billion. In other words, revenue is expected to jump 10 percent.
Did IBM really do that well in the fourth quarter? Yes and No.
Their sales are up globally, but stripping out the currency component, IBM’s sales only increased 4 percent. This means that the weakness of the US dollar helped to boost total revenue by 6 percent. On a trade-weighted basis, the dollar eased 8.1 percent through 2007 and fell as much 4.2 percent to a 27-year low through the fourth quarter. As a multinational corporation, IBM benefitted greatly from strong foreign sales. More than half of IBM’s revenues are from global businesses. According to IBM president and CEO Samuel J. Palmisano, “strong operational performance in Asia, Europe and emerging countries” encouraged such exceptional results.
Yet a 4 percent rise in annualized revenue is nothing to write home about. There are still reasons to be concerned about the company’s growth especially after they recently reported a 31 percent drop in sales of mainframe systems.
The company will release its full quarterly and 2007 year-end results on Thursday.
Considering IBM’s improved performance through the weak dollar and strong demand from Europe and Asia, Wall Street may revise their forecasts for other US-based firms higher that cater heavily to foreign demand. Global growth trends had held up relatively well, despite a spreading credit crunch. Euro-Zone annualized GDP has just begun to ease from six-year high of 3.2 percent to 2.7 percent annually through the third quarter, while Japanese expansion measured 1.5 percent from a contraction in the previous quarter.
It remains to be seen, however, whether or not the dollar’s weakness has fundamentally improved sales of US goods abroad for any other major sectors, but keep an eye out for any currency related earnings surprises. Volatility hawks in all markets will be watching the other major earnings releases scheduled for this week: Intel and Citigroup on Tuesday; JP Morgan, McDonald’s, Ford and Wells Fargo Wednesday; Blackrock, Merrill Lynch and GM on Thursday; and GE on Friday. A number of better than expected earnings reports could boost forecasts for fourth quarter growth and perhaps lead the market to reevaluate speculation of a nearly 50/50 probability of a 50 basis point or 75 basis point rate cut from the Federal Reserve on January 30th.
