From other sites
at Investor's Business Daily (Fri, 5:33PM)
at MarketWatch.com (Fri, 1:31PM)
at CNBC.com (Fri, 12:45PM)
at MarketWatch.com (Fri, 11:57AM)
at CNBC.com (Fri, 11:17AM)
at Nasdaq.com (Wed, 3:03PM)
at Zacks.com (Wed, 12:42PM)
at Zacks.com (Wed, 10:58AM)
at CNBC.com (Wed, 8:10AM)
at CNBC.com (Wed, 7:04AM)
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.
Wed, Oct. 22, 4:15 AM
- Lufthansa (OTCQX:DLAKY) is close to selling its IT infrastructure unit to IBM (NYSE:IBM), including an outsourcing agreement for the services, as part of a restructuring to better position itself to compete with low-cost carriers and Gulf rivals.
- The move will reduce Lufthansa's annual IT costs by around €70M a year, but will result in a €240M ($305.2M) charge this year.
- Under the planned deal, Lufthansa will outsource all of its IT infrastructure services to IBM under a seven-year agreement. A final price for the sale is still being negotiated.
Tue, Oct. 21, 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
Mon, Oct. 20, 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
Mon, Oct. 20, 9:21 AM
Mon, Oct. 20, 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
Mon, Oct. 20, 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
Mon, Oct. 20, 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
IBM vs. ETF Alternatives
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.
Other News & PR