Big Blue Is Black And Blue

Apr.23.13 | About: International Business (IBM)

IBM took quite a hit on Friday after a weak earnings report. The stock finished down $17.15, or 8.28%, to $190. The stock has now given up all its gains for the year after just hitting a 52-week high. All in all it was a very weak report signaling a slowdown in the global technology sector. The one bright spot was that margins rose, but that reflects cost cutting rather than business growth. No one was more affected by this report than Warren Buffett's Berkshire Hathaway which saw its stake drop by $1.2 billion in value. With this report investors must now ask themselves if they should buy the dip or abandon ship.

IBM's Earnings Results

The highlights of this report for investors include bearish items (on a year over year basis):

  • Net income was down by 1 percent
  • Revenue down by 5 percent
  • Software revenue flat
  • Services revenue down 4 percent
  • Systems and Technology revenue down 17 percent
  • Growth markets revenue down 1 percent
  • Revenues from Europe/Middle East/Africa were down 4 percent
  • Revenues from Asia-Pacific were down 7 percent
  • OEM revenues were down 16 percent
  • Revenues in the BRIC countries decreased 1 percent

The bullish items, or in this case, the least bearish include:

  • Service backlog of $141 billion, up 1 percent
  • IBM closed 22 deals of more than $100 million in the quarter
  • Business analytics revenue up 7 percent
  • Smarter Planet revenue up more than 25 percent
  • Cloud revenue up 70 percent
  • IBM reiterated full-year EPS of $16.70

Next Steps For Big Blue

According to Bloomberg, IBM is in talks to sell its low-end server business. A sale of that division will likely bring anywhere between $2.5 billion to $4.5 billion. A sale of this division will remove a drag on IBM's growth and earnings. IBM could continue to focus then on more faster growing areas. In terms of sales and order backlog, the company's sales team need to better close deals. Part of the weakness appears to have been execution. Many sales orders that were expected will now close in the next quarter. Hopefully, this is the case and not part of a larger problem where companies are purposely putting off IT spending because of a weak global economy. We'll have to wait until second quarter earnings to get a better view if this is the case or not.

A Looks At Big Blue's Stock

IBM is trading with a forward P/E of 10.29. The PEG ratio is 1.18. Overall operating margins are 21.25% and profit margins are 16.05%. On the balance sheet there's $11.99 billion in cash to $33.40 billion in debt. The company pays an annual dividend of $3.40 per share for a yield of 1.80%. The payout ratio is only 23%. IBM has been an aggressive buyer of its own stock. The stock is down 4.34% over the past year. Of the analysts that follow the stock, 4 have it rated a Strong Buy, 7 a Buy, 14 a Hold, and 1 an Underperform. Price targets on the stock range from $198 to $251 with $230 being the median target.

Outlook For Investors

I think the short-term outlook for IBM is bearish. There was nothing positive to say about first quarter earnings. The stock closed near the lows of the day and that's an indication investors were liquidating and not buying the dip. I advise holders of IBM stock to sell or buy some protection with covered calls (an income oriented strategy).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.