It’s The Margins, Stupid

For IBM , the decision to sell its PC business had as much to do with profitability as it did Big Blue’s growing focus on business services and solutions.

In the first nine months of the year, IBM’s Personal Systems Group, which includes its PC business, earned $70 million in pre-tax profits on $9.25 billion in sales. That’s a razor-thin margin of 0.75%. Grocery store chains boast better margins.

Contrast that with Dell . Like IBM, Dell doesn’t break out sales of PCs and notebooks, but they make up 79% of Dell’s business. With overall margins of 8.6% so far this year, it’s probably a safe guess that Dell’s PC business is pretty profitable.

And that’s the problem that everyone who competes against Dell must face, not just IBM. No one has yet to match Dell’s execution in the PC business, despite years of trying.

Lenovo, which is already more profitable than IBM’s Personal Systems Group, will likely prove more of a challenge than most. But even there, investors appear to have their doubts — Lenovo’s stock fell 3.7% in heavy trading overnight in Hong Kong as investors digested terms of the deal.

For IBM, the move appears to be a sound one: the company gets $1.75 billion and an 18.9% stake in Lenovo for unloading a division that contributed little to its bottom line, while focusing on higher-margin businesses like software and services and gaining a bigger presence in China.

So while pundits may bemoan the end of an era, for IBM the decision was just a business one, and one that recognizes that PCs have largely become a commodity. For Big Blue, the opportunities lie elsewhere.

Stocks closed Friday with modest losses on higher than expected wholesale inflation and better than expected consumer sentiment. Both the dollar and oil prices remained under pressure.

The Nasdaq slipped 1 to 2128, the S&P 500 declined 1 to 1188, and the Dow lost 9 to 10,543. Volume declined to 1.44 billion shares on the NYSE, and 1.81 billion on the Nasdaq. Advancers led 18-14 on the NYSE, and 16-14 on the Nasdaq. Downside volume was 53% on the NYSE, and 53% on the Nasdaq. New highs-new lows were 196-13 on the NYSE, and 91-15 on the Nasdaq.

After the close, Oracle said it will announce earnings Monday morning before the market open. The company had been scheduled to report Thursday, Dec. 16.

During the day, Motorola lost 8% on worries that a Nextel-Sprint merger could hurt business.

Finisar soared 18% on its results, while ADIC fell 6% on its earnings report.

Global Crossing climbed 7% on a financing deal, and Opsware gained 8% on a secondary offering.

Tollgrade rose 4% on a deal with Lucent .

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