On October 16, two well-known market leading technology stocks, International Business Machines Inc. (IBM) and Intel Corp (INTC), reported Q3 earnings. These earnings reports and the guidance issued by management failed to impress investors and shares fell during afterhours trading. While earnings from these companies came in below analyst expectations these are both strong companies, and with their resources and reputations these companies can overcome these hiccups to bring gains to investors.
IBM, Big Blue, is an American multi-national technology and consulting firm. The company has diverse offerings, ranging from software to cloud computing, and business consulting. Despite volatility in the IT industry over the past decades, IBM has been able to deliver a steady track record of increasing EPS. The company has shifted its business away from personal computers and other commodities, and towards high value areas such as services, software, and service integrations. This shift has moved the company away from offering products as solutions, and toward integrated solutions that generate increased business value from IT investments for clients. The company has a consulting presence in major industries like financial services, government, communications and industrials, but the companies that IBM works with span all market sectors.
IBM reported earnings per share of $3.63 for Q3 2012, which was generally in line with analyst expectations. While earnings per share did meet expectations, total revenue fell 5% year on year to $24.75 billion; and management issued full-year EPS guidance of at least $15.10, which was below the analyst consensus of $15.14. In the wake of the earnings report and weak full-year guidance, shares fell 3.2% during after hours trading at $204. Based upon the full-year 2012 earnings guidance, IBM shares sport a 2012 P/E ratio of 13.5, just above the five-year average P/E of 13.1. After the after hours drop IBM sports a 1.6% yield, and pays an annual dividend of $3.40/share.
IBM is a Warren Buffett approved dividend growth stock, and it appears poised to be a sound investment for years to come. The company expects earnings growth of roughly 10% over the next five years, and should continue to reward investors with capital gains in the years to come. In addition to solid capital gains, IBM has significant room to grow its dividend thanks to its EPS growth, and low payout ratio. While IBM may not be able to grow dividends at the 16% CAGR it has over the past five years, high single and low double-digit dividend growth is not out of the question. I believe IBM is a great company, and possibly a better stock, but investors should hope for the stock to pull back further before jumping on board. As a dividend growth investor I would look to add or begin a position in IBM if the stock falls back below $195.
Intel is the world's largest semiconductor chip maker. With 2011 revenue of $54B, Intel is the undisputed industry leader. The company is most well-known for its stranglehold on the PC market, but in 2009, the company completed a reorganization to align with all of the major product groups including: PC, Data Center, Communications and Mobility.
Intel reported Q3 2012 earnings per share of $0.60, which beat analyst expectations by $0.10, on revenue of $13.46 billion, which was flat year over year, but still beat expectations by $230 million. During the quarter, sales in the PC division fell 8%, while PC CPU prices declined 4% year over year. While the earnings report as a whole beat analyst expectations investors were disappointed by the full-year guidance issued by INTC management. Management issued Q4 revenue guidance of $13.1-$14.1 billion against consensus revenue of $13.8 billion. In addition to seeing revenue in the quarter likely fall below expectations, the company is expected to see declines in margins from 64.3% to 58%. After issuing this guidance shares fell 1.9% during after hours trading, and could be purchased for just below $22. These shares are trading with a TTM P/E of 9.2 below the five-year average of 17.7. At these prices, shares have over a 4% yield on an annual payout of $0.90.
INTC has exhibited some weakness in expanding beyond its high-energy chips, which have dominated PCs to support more mobile platforms such as smartphones and tablets. Headwinds certainly exist for INTC in the wake of soft PC demand and low market share in the mobile world, but with the R&D within INTC it should be able to develop effective products, and gain market share in the smartphone and tablet world. While overall PC sales have decreased in recent years, as hiring worldwide picks up INTC should benefit as PCs are still the ultimate business tool. With a low payout ratio, little debt, an incredibly low valuation, and expected double-digit earnings growth, INTC should reward patient DGI investors in the years ahead. INTC will likely remain depressed and see slow growth in the near term, but investors will be paid a hefty 4% dividend as they hold this stock.
Intel and IBM both delivered earnings reports and guidance that left investors looking for more. Both companies are subject to significant headwinds. For Intel they are challenged by decreasing PC sales, limited market penetration in the mobile world, and pressured margins. IBM is facing challenges from reduced spending in the private sector and more importantly from the government. Both companies will benefit as the economy recovers, as increased hiring will likely boost PC sales, and increased CAPEX will likely lead to more business opportunities for IBM. Dividend growth investors seek to purchase high-quality companies when they trade at or below fair value. Both of these are strong high-quality companies that generate significant cash flow, which should allow continued dividend growth. Q3 and full-year guidance presented speed bumps for INTC and IBM, but these are strong companies dividend growth investors should consider for their portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.