American giants warn of tough times: IBM and Philip Morris add to gloom

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The Independent Online
THERE WAS more bad news for America's largest companies yesterday, with both the world's biggest computer maker and its largest consumer-products group warning of difficult times ahead.

International Business Machines, which changed its management earlier this month after reporting its first ever decline in revenues in 1992, confirmed that the trend was continuing into the early months of this year.

Weak demand and competitive pressures resulted in a 7 per cent decline in the first quarter, with sales of its one- time staple, the mainframe computer, off 'in the high double digits'.

The company lost dollars 285m ( pounds 185m), or 50 cents a share, a figure widely anticipated on Wall Street. IBM's new chief executive, Louis Gerstner, promised only 'to continue to aggressively seek ways to improve the company's profitability'.

By contrast, Philip Morris, the tobacco, foods and brewing giant, reported what appeared to be glowing results, with earnings rising almost 11 per cent to dollars 1.2bn on worldwide sales of dollars 15.2bn.

But in large block letters on the cover of its earnings release, Philip Morris warned that 'first-quarter results should not be taken as indicative of full-year results'.

Responding to the growing threat of discount brands, Philip Morris announced earlier this month that it plans to slash the prices of its most profitable cigarette lines, cutting earnings from its US tobacco division by as much as 40 per cent this year.

With sales of its flagship brand Marlboro down in the US by more than 8 per cent in the first quarter, Philip Morris said it had embarked on an important shift in business strategy 'designed to increase market share and grow long-term profitability in a highly price-sensitive market'.

Consolidated earnings will also be hit, the conglomerate reported, although by a smaller percentage. But analysts believe price wars may extend to many other consumer packaged goods, which performed well for Philip Morris again last quarter.

Worldwide earnings by Kraft, Maxwell House and its other food divisions rose 13.5 per cent to dollars 868m, while its Miller Brewing Company saw profits rise almost 15 per cent to dollars 93m.

The gloomy reports by the two big companies, coupled with more bad news about prospects for the US economy, helped drive the Dow Jones Industrial Average down by more than 45 points, although it rallied to close at 3,443.49, down 23.50.

Although IBM was up fractionally at dollars 50, shares of both companies have suffered badly over the past year. Philip Morris stock is down 35 per cent from a year ago, when IBM last traded above dollars 100.

The news from the two companies was not all bad, according to analysts. Philip Morris continued to show strong growth overseas while IBM's fortunes appeared to have bottomed out. 'It doesn't get any worse then this,' said Willian Milton, computer industry analyst with Brown Brothers Harriman in New York. 'Even if Lou Gerstner does nothing, IBM is going to return to profitability by the end of the year.'

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