The upgrade of IBM Corp. by Lehman Bros. Friday is one of several signs the dramatic tech downturn may be nearing an end - at least that's the hope.

Technology stocks across the board led Friday's broad and impressive rally. The IBM upgrade was the first time in two years that Lehman gave a tech stock its top rating.

"We now have our first 1-rated stock," wrote Lehman analyst Dan Niles in his Friday report.

Shares of IBM surged 11%, up 6.34 to 63.92. The report by Niles said a lot more about IBM than the overall health of the tech industry, which isn't expected to see much improvement in 2003. But IBM is arguably the ultimate bellwether tech stock.

"We believe that IBM has the most complete and best developed product portfolio in our computer hardware universe," Niles wrote.

As for tech spending overall, Lehman was more cautious. The best it could say is that business demand is stabilizing and could improve slightly in 2003.

A tepid gain in information technology spending would pale compared with the double-digit budget increases seen throughout the 1990s. But it would signal a turnaround, analysts say.

"We're seeing a turning point in some tech indicators for the first time since 2000," said Jaime Roca, analyst with independent research firm Precursor Group. "The demand for IT spending is showing some signs of life."

Ready To Bid

Tech firms surveyed by Morgan Stanley say they are seeing an increase in their customers looking for them to bid on business. These request-for-proposal bids are a sign that businesses are getting ready to spend again.

Business spending accounts for two-thirds of all spending on technology. The collapse of tech stocks in 2000 was led by the abrupt slowdown in business spending. Huge sums were spent in preparation for the Y2K date change.

David Blitzer, managing director of the Index Committee at Standard & Poor's, holds the view that businesses spent their tech budget for 2000 in 1999 instead.

Another positive indicator for tech is that business spending on technology as a percent of overall capital equipment spending has held up despite market saturation.

"IT spending as a percent of business capital expenses has shown surprising resilience," said Roca. "This suggests that IT is set to improve when the economy does."

Everything's Not Roses

Just when the tech industry will recover is still a guess. Throughout most of this year, the outlook for 2003 has never been good.

In the past week, for example, two of the largest computer companies, Hewlett-Packard Co. and Europe's Fujitsu-Siemens, said they are not counting on a tech recovery next year.

On Friday Lucent Corp. said it would cut 10,000 jobs and expects a bigger loss than previously thought in the fourth quarter.

Moreover, polls of chief information officers over the last several months show they have become increasingly pessimistic about an upturn in tech spending.

Then there is the concern about war with Iraq. That partly explains the cautious tone Lehman took toward the tech industry overall in its latest report on IBM.

The threat of going to war, especially without United Nations support, is causing some grief in Europe. "This is having a dampening effect on IT spending in the foreign geographies, especially Europe," Niles wrote.

Hardware vendors told Lehman that large European corporations are worried about what a U.S. war with Iraq may lead to, both politically and economically. Some large purchase orders are being delayed as a result. Europe accounts for about 25% of IBM revenue.

The U.S., however, accounts for half of IBM's business. Signs that the U.S. market may be stabilizing are the reason Nile's gave IBM the thumbs up.

Staying Ahead

What's more, IBM has been a step ahead of some major trends, such as the move into services and the adoption of industry-standard software.

Another trend working in the favor of IBM is that business spending appeared to be targeted at making the industry's current systems more efficient.

"Spending will more likely be directed to infrastructure software and services," Roca said.

This trend favors IBM and Microsoft, in particular, he says.

As for other indicators, Roca notes that factory usage by computer, chip and communication companies is improving. During the peak of the tech boom, factories were humming near 90% of capacity or better.

Factory use has since plunged to about 63% of capacity, but that has been holding steady or slightly improving in the last several months.

That suggests to Roca that inventories are light and products are moving.

Investors.com

-- Anonymous, October 14, 2002