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IBM: Capital Returns To Shareholders Aren't Financial Engineering
- Financial engineering is an overused term when a company does a large-scale stock buyback program.
- The weak results of IBM are well documented, but the FCF remains strong compared to the market valuation.
- The recent 15% net payout yield is a strong buy signal.
Financial Engineering Is Not A Bad Thing - As Long As You Are Aware Of It
- While Apple and IBM have both borrowed money to repurchase shares, their share prices have moved in different directions.
- While Apple's sales continue to expand, IBM's revenue has declined consistently going back several quarters.
- Financial engineering is a beneficial practice for companies that can obtain inexpensive debt financing and return the proceeds to shareholders.
- However, financial engineering is unsustainable over the long term and will become especially problematic when the U.S. Federal Reserve starts to raise interest rates.
- Individual investors should investigate companies carefully to ensure they can recognize when this type of financial engineering is present and make investment decisions accordingly.
- IBM is seen as a value company and is trading off its free cash flow.
- IBM is piling up patents in graphene-related technology to bolster its server capabilities.
- IBM has many similarities in how it is run to Google, but IBM's market valuation is significantly lower.
- Many critics of IBM have been focusing on the company's difficulty transitioning to the cloud, and poor stock price performance this year.
- The company, however, has spent $19.2 billion repurchasing its stock in the past year, and has grown earnings by a double-digit amount over the course of 2014.
- Warren Buffett specifically desired strong buybacks at low prices in his letter to shareholders, and his desire has been coming to fruition with IBM over the course of 2014.
- 2014 is coming to an end and it is time to pick some winners for 2015. I offer my top two picks.
- IBM is my favorite mega-cap stock poised for a turnaround in 2015 based on improved cloud offerings, recent partnerships with other tech giants, and exciting new technologies such as Watson.
- ERII is my favorite small cap stock for 2015 because of the potential to gain market share with new products that have no competition and provide compelling value to customers.
- IBM has been in freefall for better than three months.
- The company is directionless after decades of the same broken strategies.
- I think shares still have substantial downside potential as EPS estimates for the future continue to erode.
- On the surface, IBM has nothing but problems, but fortunately, it is priced as such.
- IBM's losses have been significant, but could've been worse, a fact that aids in the reason it could trade higher.
- IBM has never been a stock that showed on the radar of high-yield investors, until now.
- IBM is trading at very low multiples at the moment following a brutal post-earnings selloff.
- To some degree, the valuation is justified due to the company's poor results recently.
- For those betting on a turnaround, the stock is a bargain at the moment, but there is as of yet no evidence of this.
- There is a hot potato being passed around at IBM. It is called goodwill.
- Goodwill has grown from less than 1% to more than 25% in the last fourteen years.
- IBM’s shareholder value is a negative $8 billion without goodwill - one intangible asset.
- It took forty-two years for Tom Watson Sr., IBM’s traditional founder, to get goodwill off the books.
- This is a prime example of IBM’s financial engineering.
New IBM, Cisco Data Center Partnership: Details, Analysis
- VersaStack Solution Combines Cisco UCS, IBM Storwize.
- Similar to Cisco, NetApp Relationship.
- Over Time, Optimized for IBM Business Applications.
- Competes With HP, Oracle, Dell Alternatives.
- The recent selloff makes IBM attractive for the long-term based on its FCF and future share buybacks.
- With Warren Buffett as the company’s largest shareholder, it’s tough to not own IBM.
- The recent quarter disappointed investors, but the long-term story remains intact.
Cloud Deals To Boost IBM's Global Services Revenues
- IBM has been systematically reducing its dependence on hardware business and increasing its focus on cloud computing services.
- In the past month, IBM has signed three multi-billion dollar deals in the European region.
- IBM's GTS and GBS divisions together make revenues of nearly $57 billion and account for 32% of its estimated value.
- WPP deal: More IT services than cloud.
- Thomson Reuters deal: Mostly IT services.
- ABN AMRO deal: Mainframe, IT infrastructure mixed in.
- Bottom line: Actual cloud revenues are unclear, but that may be the point.
- IBM is signing "baseball" contracts, using length to increase the apparent size of the deals.
- These are "outsourcing" contracts, not real cloud deals. They are replacement revenue.
- To grow IBM needs to create new markets, not serve its old markets for less.
- IBM may be focusing on the short-term increase in its stock price a bit too much.
- The fact that IBM is using debt to repurchase shares to increase the stock price is a bit unsettling because the underlying business is not doing so well.
- Leverage is a double-edged sword, too much of it can ruin a company when used incorrectly.
- I have two suggestions on what IBM can due to get back on track.
IBM: Valuation Scenarios Using The Dividend Discount Model
- After a sharp pullback to the $161 level, concerns regarding earnings forecasts are growing at IBM, with the recent abandonment of a 2015 forecast.
- Using the dividend discount model, I forecast a range of price targets for the company using 5%, 10%, 15% and 20% scenarios.
- I argue that investors should look for at least a 15% growth in DPS (dividends per share) and EPS (earnings per share) to justify buying at the current price.
- IBM is now dirt-cheap, priced at a fraction of its key competitors in technology.
- The history of the company shows it needs a strong entrepreneur to succeed.
- Activist investors can have a field day here, and you should join them.
Thu, Dec. 18, 2:04 PM
- With the help of stronger-than-expected hardware sales, Oracle (ORCL +9.2%) beat FQ2 estimates in spite of a 400 bps forex headwind (twice what was originally expected). FQ3 guidance was conservative after taking forex pressures into account.
- The numbers have been good enough for Oracle to surge to new highs and receive a slew of target hikes, and to lead many enterprise tech names to outperform amid a big market rally. The Nasdaq is up 1.9%.
- Microsoft (MSFT +3.2%), Cisco (CSCO +2.3%), EMC (EMC +3.7%), VMware (VMW +5.1%), and beaten-down IBM (IBM +2.8%) are among the enterprise tech names outperforming today. Others: SPLK +4.6%. CA +3.5%. RHT +3.4%. VRNS +6.3%. PCTY +5.8%. JIVE +4.6%. VMEM +5.2%. SAAS +4.7%. BRCD +3.8%.
- Oracle's healthy cloud software numbers are drawing attention: While traditional software license revenue fell 4% Y/Y, its SaaS/PaaS revenue rose 41%. SaaS/PaaS bookings totaled $170M, and are expected to be "well over" $1B in FY16 (ends May '16). Fusion cloud app bookings rose over 100%.
- On the CC (transcript), Oracle performed its customary trash-talking of cloud app rivals. "We are clearly growing faster than Salesforce (CRM +4%) and were more than three times the size of Workday (WDAY +3.2%)." Both firms are posting solid gains.
- Oracle's numbers come as Bloomberg reports the Chinese government is looking to "purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020." IBM, Cisco, and other U.S. firms have already seen their Chinese sales fall sharply following last year's NSA spying uproar.
Fri, Dec. 12, 12:23 PM| 24 Comments
Wed, Dec. 10, 9:32 AM
- The first ten iOS apps to stem from Apple's (NASDAQ:AAPL) alliance with IBM are now "available to enterprise customers in banking, retail, insurance, financial services, telecommunications and for governments and airlines." Initial clients for the products, offered under the IBM MobileFirst for iOS label, include Citi, Air Canada, and Sprint.
- As promised when the partnership was first announced, the apps feature embedded analytics, and are integrated with IBM cloud services built specifically for them. Initial apps include Advise & Grow (for bankers with small business clients), Retention (for insurance agents), Sales Assist (for retail workers), and Case Advise (for government caseworkers). They'll be offered by IBM's massive services arm.
- The solutions bolster Apple's growing enterprise sales push, as the company tries to win over traditionally wary CIOs, fend off Google and Samsung's enterprise efforts, and maintain an outsized share of corporate smartphone/tablet activations. Reuters reported in November Apple is also working with various startups to bring enterprise iOS apps to market.
Thu, Dec. 4, 7:04 PM
- With a corporate upgrade cycle and Web/cloud demand boosting sales, IDC estimates global server revenue rose 4.8% Y/Y in Q3 to $12.7B, an improvement from Q2's 2.5% growth and Q1's 2.2% decline. Gartner is more conservative, estimating revenue only rose 1.7%.
- "IDC has seen increasing market influence from Greater China, hyperscale datacenters, ODMs and native Chinese OEMs, all of which grew sharply in the third quarter," says VP Matt Eastwood. Like others, IDC expects Intel's recent Grantley Xeon CPU launch, together with the pending end of Windows Server 2003 support, to keep demand healthy.
- Thanks to weak demand for its high-end, Itanium-based, Integrity servers, market leader H-P's (NYSE:HPQ) share fell 140 bps Y/Y to 26.5%, after having risen 40 bps in Q2. H-P just rolled out Integrity servers running (x86-based) Intel Xeon CPUs in an attempt to stop the bleeding.
- #2 IBM's share fell 500 bps to 18.2%, thanks to both high-end (mainframe/Power) and x86 weakness. The sale of IBM's x86 server unit to Lenovo closed early in Q4. #3 Dell's share rose 80 bps to 17.8%.
- Cisco (NASDAQ:CSCO) passed Oracle (NYSE:ORCL) to take the #4 slot: Cisco's share rose 130 bps to 6.2% on the back of 31% revenue growth, while Oracle's was flat at 4.1% (3.4% revenue growth). Today, Cisco and IBM announced a converged hardware solution that pairs the former's UCS servers with the latter's Storwize storage arrays.
- As expected, white-label servers sold to Internet giants (called ODM Direct by IDC) continued gaining ground: Their share rose 250 bps to 8.9%. Everyone else saw their share collectively rise 210 bps to 18.4%.
- Related tickers: SMCI, MLNX, QLGC, ELX
Tue, Dec. 2, 6:02 PM
- WPP (NASDAQ:WPPGY), the world's biggest ad company in terms of revenue, has given IBM a 7-year, $1.25B contract to "transform and manage WPP's global technology platform." (PR)
- The deal, which expands an existing alliance between the companies, covers the building of a "hybrid cloud infrastructure" that IBM asserts will allow WPP to expand its use of big data/analytics, and to more quickly deploy new products/services (details are vague).
- IDC observed last year IBM will increasingly "collaborate and compete" with ad giants such as WPP, Omnicom, and Publicis, as it tries to profit from a shift in IT spend towards CMOs. Big Blue has made a string of marketing-related software acquisitions, looking to better compete against Oracle, SAP, Salesforce, and others chasing the opportunity.
- Yesterday: IBM strikes multi-billion dollar services deal with ABN Amro
Mon, Dec. 1, 5:54 PM
- IBM's deal with the Dutch banking giant is good for 10 years. It covers "the implementation of a private IBM cloud," as well as "fully managed services for mainframe, servers, storage, end-user computing, help desk as well as application support." Its exact price tag is undisclosed.
- The agreement comes on the heels of a $1.25B, 7-year deal with Lufthansa. IBM's services backlog was at $128B at the end of Q3, down 7% Y/Y.
Mon, Nov. 24, 3:43 PM
- Twenty-two spinoffs have been completed in 2014, the most in a decade, and another 28 have been announced. Among the catalysts are activist investors, so Credit Suisse screened for companies with multiple business segments, slow growth, and stocks trading for lower multiples than peers, in other words, "good, quality companies that are struggling to grow."
- The list is heavy on big media names like Time Warner (NYSE:TWX) and Twenty-First Century Fox (NASDAQ:FOXA), big tech like Oracle (NYSE:ORCL), Symantec (NASDAQ:SYMC), and IBM, and big industry like Lockheed Martin (NYSE:LMT), Ingersoll-Rand (NYSE:IR), and Raytheon (NYSE:RTN), but just two financial names - Travelers (NYSE:TRV) and Torchmark (NYSE:TMK).
- The rest: MO, CA, WU, DPS, PBI, SJM, HRS, SWK, EMR, WLP, MAT, GE, SNA, LLL, ITW, STJ, PDCO, HPQ, DLPH, HAS, NAVI, GME, CBS, JNJ, SLB.
Tue, Nov. 18, 5:17 PM
- Hoping to differentiate itself from Microsoft, Google, and other business e-mail rivals, IBM has launched Verse, an e-mail solution that integrates calendar data, IMs, social media updates, video chats, and file-sharing tools. The product will be offered both through the Web, and via Android/iOS apps, on a freemium basis.
- Verse relies on integrated analytics to learn a user's priorities, and to quickly provide important material (e-mails or otherwise) in an "at-a-glance" view. IBM will also include an option to conduct Watson queries (previous).
- Exec Carolyn Pampino says IBM is trying to differentiate Verse by having "more of a focus on people" and relevant conversations than rival solutions. "[Verse is] an easy and fast way to immediately filter on a person’s name."
- The product has some things in common with Google's recently-launched Inbox app, which tries to intelligently place e-mails into bundles and surface content such as photos, phone numbers, and appointment times. However, Google's solution is consumer-focused for now.
- Shares fell 1.4% today, and remain close to a 52-week low of $160.05 The Nasdaq was up 0.7%
Tue, Nov. 18, 6:44 AM
- IBM (NYSE:IBM) has won a €1B ($1.25B) outsourcing contract from Lufthansa (OTCQX:DLAKY), as the latter looks to restructure and cut costs to compete with fast-growing rivals in both Europe and the Gulf.
- Under the seven-year deal, IBM will take over the airline's information technology infrastructure services division, saving Lufthansa ~€70M a year. Around 1,400 Lufthansa Systems employees will now transfer to IBM.
- Previously: Lufthansa, IBM in talks over IT infrastructure unit sale
Fri, Nov. 14, 11:34 AM
- The Department of Energy has awarded $325M in contracts to IBM (IBM +0.6%) to create two GPU-accelerated supercomputers declared to be at least 3x more powerful than any existing system.
- The systems will rely on IBM's Power CPUs, Nvidia's (NVDA +0.5%) Tesla GPUs and NVlink GPU interconnects, and Mellanox's (MLNX +2.1%) 100Gb/s InfiniBand interconnects. Installation is expected in 2017.
- IBM asserts the systems will lower energy consumption by limiting data movement. The deal acts as a nice reference win for Power - Big Blue is trying to stem Power's share losses to Intel's Xeon CPUs by selling to 3rd-party server OEMs and licensing the architecture to other chip developers. Its powerful Power8 CPU (12 cores supporting 96 simultaneous threads) began shipping earlier this year.
- Separately, the DOE says it will invest $100M in FastForward2, an R&D program to create more powerful/energy-efficient supercomputers. IBM, Nvidia, Intel, AMD, and supercomputer maker Cray (CRAY +0.1%) are among the companies taking part.
- PRs: IBM, Nvidia, Mellanox
Tue, Nov. 4, 2:13 AM
- IBM (NYSE:IBM) is replacing the head of its struggling technology-services unit, the latest move by CEO Ginni Rometty to get Big Blue growing again.
- Martin Jetter, who currently heads IBM's operations in Japan, has been named head of its global technology services unit, effective immediately.
- Last month, IBM paid $1.5B to Globalfoundries to take over its loss-making semiconductor unit.
Mon, Nov. 3, 3:38 PM
- 11 days after Amazon (NASDAQ:AMZN) disclosed its main AWS reporting segment saw revenue rise 15% Q/Q and 40% Y/Y in Q3, Synergy Research estimates the company's combined cloud infrastructure (IaaS) and app platform (PaaS) revenue share totaled 27% in Q3, still more than 2x that of any rival.
- Nonetheless, competitors are gaining ground. Synergy thinks Microsoft (MSFT +0.9%), which saw 128% Y/Y Commercial Cloud growth in Q3 (covers both Azure and other services), saw its share rise above 10%. IBM (IBM -0.1%), which reported an 80% Y/Y Q3 increase in "cloud delivered as a service" revenue, is assigned a 7% share. Google, Salesforce, and Rackspace are close behind.
- In a PR, IBM states Synergy declared it to be "the #1 hybrid and private cloud provider for the enterprise." Big Blue has committed $1.2B to building up to 15 new data centers from which to deliver IaaS/PaaS services.
- Hybrid clouds are also pivotal to Microsoft's efforts to gain ground against Amazon. Last month, the company unveiled a new hardware platform (to be sold by Dell) that can handle Azure private cloud services, and link with Microsoft's public cloud services to create a hybrid cloud.
- Synergy thinks industry IaaS/PaaS revenue rose 49% Y/Y on a rolling annualized basis, and that trailing 12-month revenue has topped $14.5B. IDC expects public IT cloud services revenue (IaaS, PaaS, and SaaS) to post a 22.8% CAGR from 2014-2018, growing from $56.6B to over $127B.
Fri, Oct. 31, 6:49 PM
- Tencent's (OTCPK:TCEHY) MyApp Android app store is now seeing 100M daily downloads, up from just 76M in July. The figure covers both apps downloaded directly from the MyApp store, and from Tencent's WeChat and Mobile QQ messaging platforms.
- Qihoo and Baidu's 91 Wireless unit remain the leaders in China's fragmented Android app store market - 91 Wireless averaged 130M downloads/day in Q2. But the near-ubiquitous reach of WeChat/QQ within China, together with Tencent's mobile gaming clout, is helping Tencent gain ground.
- Separately, Tencent, which is best known for its consumer offerings, has signed an MOU with IBM to jointly sell cloud apps and related services to Chinese SMBs. Tencent's cloud services unit will host the apps, and IBM will provide consulting and IT services.
Wed, Oct. 29, 12:10 PM
- The partnership will allow businesses to "incorporate Twitter (TWTR -2.1%) data into their decision-making through an established set of IBM (IBM +0.1%) tools, solutions and consulting services." (PR)
- IBM plans to "offer Twitter data as part of select cloud-based services, including IBM Watson Analytics," and allow 3rd-party developers to integrate Twitter data into services they're creating via IBM's cloud app platform (PaaS) offerings.
- The first joint solution will involve IBM's ExperienceOne customer engagement software/services. Eventually, the companies will offer "solutions for specific industries such as banking, consumer products, retail, and travel and transportation."
- Twitter: "While companies have long listened to what their customers are saying on Twitter, complex enterprise decisions often require input from a lot of different systems. IBM’s expertise is in integrating complex systems and data to make better decisions."
- While IBM's total revenue fell 4% Y/Y in Q3, its business analytics revenue was up 8%; Big Blue has made a string of acquisitions to bolster its analytics portfolio.
- No details are given on the revenue Twitter will receive for providing its data. Twitter's data licensing/other revenue rose 171% Y/Y in Q3, and made up 11% of total revenue.
Tue, Oct. 28, 12:37 PM
- Along with declaring its regular dividend, IBM (IBM +0.2%) has announced it's adding $5B to its buyback plan, raising its total authorization to $6.4B. The company expects to request a new authorization at its April 2015 board meeting.
- With free cash flow declining - it's down 13% Y/Y over the first 9 months of 2014 - IBM has slowed its buyback pace in recent quarters. Big Blue spent $1.7B on buybacks in Q3, down from $3.7B in Q2, and stated earlier this year it would spend less on buybacks in 2014 than the $13.9B spent in 2013.
Tue, Oct. 28, 12:27 PM| 2 Comments
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International Business Machines Corp is an Information Technology (IT) company. It creates business value for clients and solves business problems through integrated solutions that leverage information technology & knowledge of business processes.
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