- IBM missed consensus on the top and bottom lines.
- The weakness confirms our opinion that IBM is too big to grow and its buybacks can only do so much.
- We noted that the company’s products are struggling and should continue to do so.
Update: IBM Q3 Earnings - I Was Wrong About Earnings Quality
- Q3 Earnings release showed lower revenue and earnings.
- Results have changed my opinion.
- The weak performance was not anticipated.
- Surprisingly bad Q3 results have caught investors on the wrong foot.
- In my article I will try to ignore the confusing shouts and screams and chatter of the marketplace and instead focus on analyzing the Q3 figures.
- By putting them into a broader context, we will recognize that IBM is probably watched through the wrong pair of glasses, which leads to an unfair valuation.
- IBM reported a truly weak quarter and withdrew its 2015 guidance for $20 EPS as the company struggles to adapt to changing technology.
- Weakness was across the board, the service backlog fell 7%, and revenue even fell in growth markets.
- Declining revenue and falling margins are finally putting pressure on earnings and free cash flow.
- At 10-11x earnings, IBM is more likely a value trap than a value, and I would continue to avoid the stock.
Update: IBM Continues Share Buybacks Despite Q3 '14 Earnings Miss
- IBM reported Q3 '14 earnings.
- The stock is even more attractive after the sell-off.
- The weak earnings were not anticipated, but the large FCF and stock buybacks offset that weakness.
Not Quite A Death Spiral But A Resounding Bayesian No To IBM As Odds Increase That Buffett Got It Wrong
- By now most interested investors know that IBM missed earnings and revenues, removed the $20 EPS forecast for 2015, and made a disastrous sale of its semiconductor unit.
- This is more than a standard "miss"; it contains new information of Bayesian import in assessing the long term future prospects of IBM.
- Critics like 30-year IBMer Peter Greulich (in SA) have made intelligent and detailed observations on IBM which now have clearer meaning and greater force.
- IBM is not yet in a "death spiral," but the risks have increased.
- What was Buffett thinking? (We sort of know.) What is he thinking now? (I'd love to know.).
IBM - Sell-Off Is Warranted As Business Model Is Under Serious Threat
- IBM's third quarter earnings report is essentially a profit warning.
- The company dropped its 2015 outlook and sold its chip manufacturing activities at a big loss.
- Despite the sell-off, appeal is not imminent given the rapid change in the industry, something for which the company is wholly unprepared.
IBM Earnings Preview: Longer Term, Big Blue Needs Revenue Growth
- Consensus 2015 EPS growth still looking for 11% or low-double-digits.
- Revenue growth remains an issue.
- Like stock into year-end '14, Longer term, IBM needs revenue growth.
Is IBM Worthy Of A Position In A Portfolio Right Now?
- The company seems to be extremely undervalued with respect to 2015 earnings estimates.
- The company has excellent financial efficiency ratios with extremely high ROE and ROI values.
- I like the stock but I feel that there may be a little bit more risk than reward at this time.
- IBM is slated to report 3Q 2014 earnings after the close of trading on Monday, October 20th.
- Adjusted/Non-GAAP Earnings Per Share (EPS) is forecast to come in at $4.32 per share.
- Revenues: The estimate is $23.38 bln (range is: $22.96 bln to $23.67 bln).
IBM Is The Top Dividend Growth Stock In The IT Services Industry
- The IT Services Industry includes four large stocks that yield more than 2%.
- Each of these companies has an impressive history of dividend growth, and is therefore worthy of consideration by income investors.
- Despite paying the lowest current dividend of the group, IBM's heavily discounted valuation and conservative payout ratio make it a compelling opportunity for long-term dividend growth investors.
The Investment Contest Of The Century: Warren Buffett And The Stock Market Go Toe-To-Toe Over IBM
- For fifteen years the stock market’s consistent message has been one of caution.
- Warren Buffett is investing into the face of the market’s combined wisdom.
- It would be prudent for a low-risk IBM investor to wait until Warren Buffett isn’t referenced in most financial articles about IBM, or when IBM’s market value strengthens.
- Until IBM invests in its business instead of its stock, it is a risky investment for all investors except those that like a short-term playground for their money.
- IBM currently trades at below 10x forward earnings per share.
- Despite a payout ratio of below 25%, the stock yields 2.3% and appears significantly overvalued based on a dividend growth model analysis.
- The company is trading between 10%-15% below its historic earnings multiples, and offers a 35% higher dividend yield than it has averaged over the previous five years.
- IBM's stock should be included in every diversified large cap dividend stock portfolio.
- IBM will benefit from its new Watson Analytics tool, and from shifting to its strategic growth areas including cloud, big data analytics, social, mobile and security.
- IBM has good valuation metrics and strong earnings growth prospects.
IBM And Inspur Become Partners As IBM Seeks To Avoid Regulatory Issues
- Inspur and IBM had a competitive relationship in China.
- The deal between the companies should help IBM avoid becoming further entangled in the regulatory environment.
- IBM's high CAGR in dividends can't be sustained without top line growth.
- I expect the deal will reduce revenues in China but improve margins.
This Could Be The Catalyst All IBM Investors Have Been Waiting For
- IBM’s growth rate is aided by share buybacks and it is no longer a strong growth play.
- Its payout ratio is low and we feel it should be increased to improve investor demand in the shares.
- Doing so could be the catalyst to send a great value share price much higher.
IBM: Trading At A Discount And Double-Digit Dividend Growth
- IBM's global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing.
- Its solutions, global market presence, and significant economies of scale provide an unrivaled advantage over its competitors. Given its diversity, the company is well-positioned to weather future economic storms.
- As a dividend growth stock, IBM has enjoyed double-digit dividend increases the last 10 years. The stock is currently trading at a discount to my calculated fair value.
Today, 10:54 AM
- Evercore has downgraded IBM (IBM -4.2%) to Hold a day after the company missed Q3 estimates, offered light full-year guidance, pulled its 2015 EPS target, and reported a 7% Y/Y services backlog drop. Not surprisingly, many other firms have cut their targets.
- Credit Suisse's Kulbinder Garcha, bearish for some time, has slashed his target by $35 to $125. Though calling the resetting of expectations a positive and noting a mainframe upgrade cycle is on the way, Garcha argues IBM "continues to face multiple issues to revenue growth including high mainframe exposure, negative cloud impact and weak IT spending."
- BofA/Merrill's Wamsi Mohan tries to find a silver lining. "In our opinion, the reset in expectations provides an opportunity for IBM to redefine the broader strategy without the rigidity of near term targets. We expect a detailed business strategy update at the Analyst day in 2015 but near term headwinds will likely keep the stock range bound and we remain Neutral."
- The WSJ observes IBM could lose its status as one of the S&P 500's 20 most valuable companies for the first time in history.
- Yesterday's earnings coverage
Yesterday, 12:03 PM
- After badly missing Q3 EPS estimates (in spite of backing out the losses of its soon-to-be-sold chip unit), IBM (IBM -6.7%) guided on its Q3 CC for 2014 EPS from continuing ops. to be down 2%-4% Y/Y. That implies a range of $15.97-$16.30, soundly below a $17.87 consensus.
- Big Blue also says it took a $3.3B Q3 post-tax charge related to the chip business; the figure includes the $1.5B payment to Globalfoundries.
- During a CNBC interview, CEO Ginny Rometty suggested fresh layoffs are on tap. The company recorded a $1B workforce rebalancing charge back in Q1; its headcount was at 431K at the end of 2013.
- IBM's closely-watched services backlog fell 7% Y/Y in Q3 to $128B, a much sharper drop than Q2's 1%; the company declares it saw "insufficient" services productivity. Also worrying investors: Gross margin fell 90 bps to 49.2%, ending a long string of Y/Y gains.
- Other pressures on EPS: 1) The non-GAAP tax rate rose 80 bps Q/Q and 320 bps Y/Y to 20.8%. 2) Buybacks fell to $1.7B from Q2's $3.7B. 3) Opex for continuing ops rose 2% Y/Y, while revenue from continuing ops fell 4% (helps explain the job cut talk).
- Hardware revenue (excludes chips) -15% Y/Y; software -2%; global tech services -3%; global business services -2%; financing -3%. Within hardware: Mainframes -35%; Power systems -12%; x86 servers (just sold to Lenovo) -10%; storage -6%.
- Two strong points: "Cloud delivered as a service" revenue is up over 80% YTD ($3.1B/year run rate), and security revenue is up over 20% YTD.
- Americas revenue -2%; EMEA -2%; Asia-Pac -9%. "Growth markets" -6%, with BRIC countries down 7%.
- Free cash flow ($2.2B) was once more well below net income ($3.7B). IBM ended Q3 with $9.6B in cash, and $17.1B in non-financing debt.
- Q3 results, details, PR
Yesterday, 9:21 AM
Yesterday, 7:30 AM
- "We are disappointed in our performance," says CEO Ginni Rometty. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."
- Non-GAAP operating income from continuing operations (excludes semiconductor business whose acquisition by Globalfoundries was announced today) of $3.7B is off 18%; operating EPS of $3.68 is lower by 10%. Gross profit margin of 49.2% down 90 basis points.
- Guidance will be discussed further in the 8AM ET conference call, but the presentation slides say the company no longer expects to deliver at least $20 in operating EPS in 2015.
- More from Rometty: "We again performed well in our strategic growth areas cloud, data and analytics, security, social and mobile - where we continue to shift our business. We will accelerate this transformation."
- IBM -8% premarket
- Previously: International Business Machines misses on revenue
Yesterday, 7:09 AM
- International Business Machines (NYSE:IBM): Q3 EPS of $3.68 misses by $0.64.
- Revenue of $22.4B (-4.0% Y/Y) misses by $970M.
- Shares +1% PM.
- Press Release
- Previously: Globalfoundries to take control of IBM's semiconductor operations
Yesterday, 1:40 AM
- IBM (NYSE:IBM) has reached an agreement with Globalfoundries to take over its loss-making semiconductor unit, WSJ reports.
- Under the terms of the deal, IBM will pay Globalfoundries $1.5B to take the chip operations off its hands, a source says.
- IBM is scheduled to report Q3 earnings premarket.
- Previously: IBM to make 'major announcement,' release earnings Monday morning
Sun, Oct. 19, 5:59 PM| 57 Comments
Sun, Oct. 19, 5:30 PM
Tue, Oct. 14, 2:31 PM
- IBM's (IBM +0.5%) SoftLayer unit has been added to the list of cloud infrastructure (IaaS) providers supporting SAP's (SAP +0.7%) Hana Enterprise Cloud platform, which delivers SAP cloud apps (including the core SAP Business Suite) running on top of the company's Hana in-memory database.
- SAP already offers Hana Enterprise Cloud through its own data centers. The company also supports Hana use by 3rd-party cloud app developers, both through its own Hana Cloud platform and Amazon Web Services.
- An SAP exec talks up the geographic reach of IBM's data centers, and its ability to address security concerns. "A lot of our customers are concerned about data sovereignty and privacy controls. IBM was the obvious choice to help us address that."
- In January, IBM announced plans to build 15 new data centers to expand its cloud reach. Amazon and Microsoft have also been growing their global data center footprints.
- Separately, SAP has struck an OEM and managed cloud services deal with Unisys (UIS +1.1%). Unisys will offer Hana-based "bundled data analytics solutions" running on its Forward high-end server platform, as well as Hana-based analytics services "hosted in a Unisys- or partner-managed data center through a pay-for-use subscription." The services are initially aimed at U.S. federal clients.
Fri, Oct. 10, 2:00 PM
- "We think IBM (IBM +0.5%) will continue to be a critically important IT company long-term due to its deep R&D investments, but we think the company faces a period of market transition," says Jefferies' James Kisner, launching coverage on Big Blue (as part of a sector launch) with an Underperform rating and $163 target.
- Like many other analysts, Kisner is worried about the impact of the cloud transition - both the adoption of cloud/SaaS apps and public cloud infrastructure services (often running on white-label hardware). He also highlights a broader shift in IT spend from "legacy" vendors as investments are made in "growth initiatives."
- In addition, Kisner echoes sell-side concerns about IBM's earnings quality: He thinks the company is respectively too dependent on vendor financing and buybacks for sales and EPS growth, and notes free cash flow has trailed net income.
- In spite of the launch, IBM is up modestly on a down day for tech. Q3 results are due on Oct. 20.
Mon, Sep. 29, 2:00 AM
- Lenovo (OTCPK:LNVGY) will complete its $2.1B acquisition of IBM's (NYSE:IBM) x86 server unit on Oct. 1, giving China's biggest personal computer maker a major asset to expand its business client offerings.
- The closing purchase price is lower than the $2.3B valuation announced in January because of a change in the valuation of inventory and deferred revenue liability, says Lenovo.
Fri, Sep. 26, 6:55 PM
- The cloud-based Watson Analytics service (recently launched) is aimed not only at IBM's mainstay enterprise clients, but also SMBs worried about the costs of an in-house analytics infrastructure. "Large companies are further along in adopting analytics, while SMBs are falling behind," says IBM exec John Mason.
- With an official goal of putting "powerful analytics in the hands of every business user," IBM has furnished Watson Analytics with a number of self-service tools that can be handled by non-technical users, and the ability to quickly integrate with popular business apps from the likes of Salesforce, Oracle, and Google.
- Big Blue has also opted for a freemium pricing model: Users can do basic data analysis for free, but have to pay if they want more advanced features. IBM is aiming for its broader Watson business to produce $10B/year in sales in 10 years; it reportedly produced only $100M as of Oct. 2013.
- Meanwhile, IBM's SoftLayer cloud infrastructure (IaaS) unit is intent on making further inroads with startups, a demographic that historically hasn't been an avid consumer of IBM's wares.
- Though Amazon has an outsized IaaS share among startups, SoftLayer has made some progress with the help of features such as bare metal server support and free private networking between data centers. SoftLayer has especially fared well with gaming startups.
Thu, Sep. 11, 7:08 PM
- After moving back above the $100/share level, Apple (NASDAQ:AAPL) is back over the $600B mark in market cap, pushing it nearly $200B above Exxon Mobil (NYSE:XOM), the next largest company in the U.S.
- XOM is still valued at more than $400B, but Google (NASDAQ:GOOG) at $397B and Microsoft (NASDAQ:MSFT) - which has surged in 2014, adding $74B in market cap to $386B - are closing the gap.
- Berkshire Hathaway (NYSE:BRK.B) completes the top five with a $339B market cap; no other companies are worth more than $300B.
- Rounding out the top 20 market caps: JNJ, WFC, GE, WMT, CVX, PG, JPM, FB, VZ, IBM, PFE, KO, ORCL, T, MRK.
Sat, Sep. 6, 8:43 AM
- The "total" yield of a company combines the dividend yield and the buyback yield - that is the yield boost from reducing the total amount of shares outstanding. Together with S&P's Howard Silverblatt, Barron's puts together a list of the top 20 companies in the S&P 500 based on "total" yield.
- While buybacks don't guarantee a strong stock - witness consistent buyback champs like IBM and Kohl's (NYSE:KSS) - Warren Buffett goes to bed at night praying for IBM's share price to go down so the company can buy back more stock for a given dollar amount (though The Oracle has said he doesn't expect this logic to win many fans).
- The flip-side are those companies - financials and energy come to mind - who tend to buy back stock at high prices only to find themselves forced to reissue it at lower prices when times get tough. A consistent plan helps, and Travelers (NYSE:TRV), under CEO Jay Fishman, has been maybe the best example of this - halving the share count since the end of 2006.
- ETFs? The Powershares Buyback Achievers Portfolio (NYSEARCA:PKW) gained 45.6% in 2013, 1,300 basis points better than the S&P 500. Since inception in 2006, it's up an annualized 9%, more than 200 basis points better than the S&P. A newcomer - the Cambria Shareholder Yield ETF (NYSEARCA:SYLD) - has beaten the S&P by about 250 basis points since its May 2013 inception.
- The list (ranked in order of "total" yield): ADT, CAM, CF, MOS, MPC, VIAB, GLW, ITW, STX, IBM, NOC, CTL, TRV, VRSN, IR, CCE, KSS, NTAP, HES, DO.
Wed, Aug. 27, 7:21 PM
- IDC estimates global server sales rose 2.5% Y/Y in Q2 to $12.6B. That marks a turnaround from the 2.2% drop seen in Q1, and the 4.4% drop seen in Q4. Gartner estimates sales grew 2.8%.
- IDC declares the server market, hurt in recent quarters by system consolidation and a shift in demand towards the white-label gear beloved by Web giants (referred to by IDC as ODM Direct), is seeing "the beginning of a cyclical refresh cycle." It sees the pending launch of Intel's (NASDAQ:INTC) Grantley Xeon CPUs, along with Microsoft's plans to end Windows Server 2003 support, lifting sales into 2015.
- Sales of x86 servers (mostly Intel-based) rose 7.8% in Q2, and now make up 78% of industry revenue. Non-x86 server sales fell 12.8%.
- Market leader H-P's (NYSE:HPQ) share rose 40 bps Y/Y to 25.4%, with x86 growth offsetting Itanium weakness. #2 IBM's share fell 340 bps to 23.6% ahead of the sale of its x86 server ops to Lenovo; on the bright side, IBM's decline narrowed from Q1's 600 bps.
- #3 Dell's share fell 160 bps to 16.2%. #4 Oracle's (NYSE:ORCL) grew 10 bps to 5.9%, with engineered system growth offsetting declines for older UNIX/SPARC server lines. #5 Cisco (NASDAQ:CSCO), which recently proclaimed its UCS server ops are on a $3B/year run rate, saw its share rise 140 bps to 5.8% on the back of 35% growth. Cisco should pass Oracle in a quarter or two.
- ODM Direct vendors saw their share grow 110 bps to 6.6%. The shares of all other vendors rose 190 bps to 16.1%.
- Related tickers: SMCI, MLNX, QLGC, ELX
Tue, Aug. 26, 3:12 PM
- It would be Apple's (AAPL -0.4%) largest-ever iPad (current versions are 9.7" and 7.9"), and production is set to start early next year, reports Bloomberg. The move comes as sales for iPads have declined for two straight quarters, and suggests the company is going to go after enterprise customers where the larger device could replace the traditional laptop.
- Apple, of course, has partnered with IBM, and Tim Cook has said part of the rationale behind the deal was to sell to corporations as a "catalyst for future iPad growth."
- Previously: Apple/IBM deal wins praise; hardware impact debated
IBM vs. ETF Alternatives
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