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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.
IBM Fundamental And Algorithmic Analysis: Will Big Blue Bring Big-Time Blues?
- IBM revenue hasn't grown for the last 10 quarters; this Q3, the company experienced its worst earnings miss in recent history, and consequently, dropped its long-anticipated 2015 growth plan.
- Currently, IBM faces criticism: specifically, revenue stagnancy, poor international growth, inaccurate performance estimates, late transition to modern sectors, and stock buyback dependency have all been deemed problematic.
- Nevertheless, IBM still has strengths; analysts and investors feel its past rebounds, legendary current status, strong leadership, novel-sector growth, cutting-edge research, and recent partnerships make it worthwhile despite the drop.
- I Know First's algorithm predicts a bullish forecast for IBM in the 1-month and 3-month time frames.
Tue, Jul. 15, 4:50 PM
- As part of a comprehensive enterprise mobility partnership, Apple (NASDAQ:AAPL) and IBM plan to develop 100+ "industry-specific enterprise solutions," including new iPhone/iPad apps.
- The apps will begin to arrive this fall, and IBM will resell iPhones/iPads containing them to clients worldwide.
- The companies also plan to develop IBM cloud services optimized for iOS. Targeted markets include security, mobile device management (MDM), and big data/analytics. New enterprise-focused AppleCare services will be offered, as will "new packaged offerings from IBM for device activation, supply and management."
- Apple, which maintains an outsized share of enterprise mobile hardware activations, has tried hard to grow its business footprint during the Tim Cook era. Aside from any value provided by the new apps/services, Big Blue's credibility and relationships with Global 2000 firms should provide a shot in the arm for Apple's efforts.
- As for IBM, the deal adds to a mobile software/services push that has already resulted in a string of acquisitions and product launches.
- AAPL +1.4% AH. IBM +2%. BlackBerry (NASDAQ:BBRY) -3.2%, as investors worry about the MDM portion of the alliance. MobileIron (NASDAQ:MOBL) could also be affected by it.
- Update: Tim Cook, discussing the deal with re/code: "We’re good at building a simple experience and in building devices ... The kind of deep industry expertise you would need to really transform the enterprise isn’t in our DNA. But it is in IBM’s."
Wed, Jul. 9, 7:21 PM
- Though its struggling chip manufacturing unit is reportedly on the block, IBM is committing $3B over 5 years to develop new chip technologies.
- Big Blue's efforts will focus on pushing the limits of Moore's Law - whereas transistor widths are currently down to 14nm, IBM will explore ways to bring them to 7nm or less in time - and on commercializing unconventional materials and technologies.
- The materials/technologies in question include carbon nanotubes, silicon photonics, graphene, and quantum computing. Intel, H-P, and Nokia are among the companies exploring one or more of those fields.
- Even if its chip manufacturing unit gets sold, IBM is likely to continue designing chips for its own hardware (for example, its Power server CPUs). The company has also built up a lucrative IP licensing business that partly relies on chip-related IP.
Mon, Jul. 7, 7:26 AM
- IBM (IBM) will partner with Beijing - increasing the monitoring and forecasting capabilities of the Chinese capital to reduce its issues of severe smog. IBM aims to help the city through its collection of real-time emissions data and forecasting expertise, and to help it attain its 10-year Green Horizon initiative.
- Beijing already has an alert system to predict heavy pollution days in advance, allowing it to shut schools and factories when needed, but residents say is not enough.
Fri, Jul. 4, 4:42 AM
- Lenovo's (LNVGF) $2.3B deal for IBM’s (IBM) low-end server business has been approved by the the Chinese Ministry of Commerce's anti-monopoly bureau.
- The acquisition is still awaiting approval in the U.S., as the Committee on Foreign Investment in the United States investigates possible American national-security risks under the proposed deal, including concerns of the Pentagon's use of IBM servers.
Wed, Jul. 2, 1:56 AM
- Lenovo (LNVGF) is still expecting to close the $2.3B deal on IBM’s (IBM) low-end server business this year, although the acquisition is still being investigated by the U.S. for national-security risks.
- One of the main concerns is that IBM's x86 servers are used in U.S. communication networks and in data centers that support the Pentagon's computer networks.
- The company is also attempting to obtain regulatory approval to buy Google's Motorola Mobility, in another multi-billion-dollar acquisition valued at $2.9B.
Wed, Jun. 11, 11:22 AM
- Bloomberg's report follows an April WSJ report calling Globalfoundries "the lead candidate" to buy IBM's (IBM -0.6%) chip manufacturing/foundry ops. Notably, Globalfoundries is said to be more interested in Big Blue's chip engineers and IP than its relatively old wafer fabs.
- A source states the unit has been losing as much as $1.5B/year. Its Q1 sales fell 16% Y/Y amid continued share losses to Globalfoundries, Samsung, and foundry giant TSMC (TSM -0.5%).
- Nonetheless, the business claims high-profile foundry clients such as Cisco and Juniper, and has a history of leading the way in mass-producing new chip technologies/materials, such as silicon-on-insulator (SOI) and silicon germanium (SiGe).
- That could help Globalfoundries as it tries to gain ground against TSMC, which has a long list of blue-chip mobile processor, GPU, and FPGA clients.
- The WSJ's report stated the unit has received $1B+ bids - less than the $2B+ IBM was initially seeking.
Fri, Jun. 6, 6:40 PM
- Thanks to a 25% drop in high-end storage spend, external disk storage and total disk storage sales respectively fell 5.2% and 6.9% Y/Y in Q1, says IDC. Those figures contrast with Q4 growth rates of 2.4% and 1.3%.
- Market leader EMC, which depends heavily on its high-end Symmetrix line, saw its external share fall 110 bps Y/Y to 29.1%, and its total share fall 50 bps to 22.4%. EMC previously reported its high-end sales fell 22% in Q1; strong flash/scale-out storage sales partly offset the drop.
- NetApp's (NTAP) low high-end exposure allowed its shares to grow 30 bps and 50 bps to 15.1% and 11.7%, in spite of a 2.8% revenue drop. H-P's (HPQ) external share rose 40 bps to 8.8% (3PAR strength), but its total share fell 20 bps to 15.1% (server weakness).
- Things still look bleak for IBM, which reported a 23% Y/Y Q1 system storage revenue drop: Its external share fell 200 bps to 8.8%, and its total share 180 bps to 10.1%.
- The total disk share of non-top-5 vendors rose 370 bps to 28.8%. Chalk that up to both surging demand for cloud storage (getting cheaper by the quarter) running on commodity hardware, and solid momentum for flash/hybrid storage upstarts such as Nimble (NMBL), Pure Storage, and Nutanix.
- Hard drive/assembly suppliers: STX, WDC, HTCH
Thu, Jun. 5, 7:40 PM
- Dozens of companies, including IBM and H-P (HPQ), found an unwelcome surprise in their supply chains in their search for "conflict minerals," part of the Dodd-Frank Act designed ferret out any connection to mines controlled by armed groups in the Congo: Many of their products contain North Korean gold.
- IBM, for example, disclosed that the North Korean gold was used to make its memory storage systems.
- North Korea’s central bank provides currency for the country and refines gold, but U.S. sanctions law bars importing materials from the country, even if it comes from deep within a supply chain.
- "There is still a long way to go in understanding supply chains," says an attorney who deals with conflict mineral disclosures.
- Other companies making the discovery included Ralph Lauren (RL), Rockwell Automation (ROK) and Williams-Sonoma (WSM).
Thu, Jun. 5, 2:15 AM
- Lenovo (LNVGF) and IBM (IBM) are looking to extend their deal deadline, as the Committee on Foreign Investment in the United States (CFIUS) continues the review of Lenovo's planned purchase of IBM’s low-end server unit for $2.3B.
- The CFIUS assesses acquisitions for their national-security implications, and the deal between China-based Lenovo and IBM comes at a time of tensions between the U.S. and China over spying and hacking claims.
- IBM CEO Ginni Rometty has stressed the importance of the deal, and how it could stage a comeback for IBM, as users increasingly change to cloud-computing, reducing the need for servers and mainframes.
- If approved, Lenovo has stated that the companies can seal the deal by the end of the year.
Fri, May. 30, 6:41 PM
- IDC estimates global server sales fell 2.2% Y/Y in Q1, a slightly smaller decline than the 4.4% drop seen in Q4. Gartner, however, puts the decline at 4.1%.
- The embrace of white-label hardware by Web giants continues taking a heavy toll: IDC thinks white-label sales, which it calls ODM Direct, grew 75% Y/Y (up from Q4's 47% clip) and made up 7.3% of industry revenue, up from 6.4% in Q4 and 4.1% a year ago.
- IDC estimates market leader H-P (HPQ) saw its share hold steady at 26.5%, after having grown (at IBM's expense) 260 bps Y/Y in Q4. #2 IBM, whose hardware sales have been battered, saw its share fall 600 bps Y/Y to 19.1%.
- #3 Dell's share slipped 20 bps to 18%, while #4 Cisco (CSCO), which just reported a 29% Y/Y April quarter sales jump for its UCS server segment, saw its share rise 170 bps to 5.7%. #5 Oracle (ORCL), whose server sales are finally stabilizing thanks to engineered systems growth, rose 20 bps to 4.9%.
- Sales of x86 servers, over 90% of which contain Intel (INTC) CPUs, rose 4.9% after growing 7.8% in Q4. Non-x86 server sales tumbled 25.2%, and now make up just 17.9% of industry revenue.
- Cisco now has an estimated 24.4% of the blade server market, behind only H-P's 43.7%.
Fri, May. 23, 6:43 PM
- IBM will stop selling NetApp (NTAP) storage hardware offered under the N Series label on May 27, per an internal memo picked up by Bloomberg.
- As it is, NetApp's OEM revenue (heavily dependent on IBM) fell 34% Y/Y in the April quarter to $109.8M (7% of total revenue).
- IBM's efforts to emphasize its own hardware played a role, as did Big Blue's competitive struggles - the company's total storage system sales fell 23% Y/Y in Q1, and IDC thinks its industry share fell 200 bps Y/Y in Q4 to 14%.
- On the FQ4 CC (transcript), CFO Nicholas Noviello forecast NetApp will see its OEM business decline "up to 40%" in FY15 (ends April '15). The company's branded revenue (93% of total in FQ4) is expected to grow at a mid-single digit rate.
- CEO Tom Georgens noted OEM sales include not just the N Series, but also sales of E-Series systems (high-performance SAN), which (OEM or otherwise) have been growing as a % of NetApp's revenue. He also insisted NetApp is "firmly positioned" with OEMs not named IBM.
- Previous: IBM to stop selling NetApp gear
Fri, May. 23, 3:29 PM| 1 Comment
Mon, May. 19, 6:52 PM
- IBM has bought Cognea, a startup developing virtual assistants that interact with users via A.I.-based personalities. Terms are undisclosed.
- Big Blue plans to integrate Cognea's technology with its Watson A.I. hardware/software, with the goal of allowing Watson to deliver "conversational services." Potential end-markets mentioned by the company include "virtual personal assistants, health coaches, companions for elderly people, investment advisors, tutors, travel agents, customer care agents and shopping advisors."
- Google (Now), Apple (Siri), Nuance (Dragon Mobile), and Microsoft (Cortana) are few of the companies that have already made big investments in virtual assistant platforms.
- IBM, hungry to halt double-digit server revenue declines, promised to invest over $1B in Watson in January, including $100M in startups working on software/services for Watson systems. But while the company is hoping Watson produces $10B/year in revenue in ten years, the platform had only produced $100M in revenue as of last October.
Wed, May. 14, 3:48 PM
- IBM (IBM -1.9%) execs tried to convince those at its analyst day meeting today that its business will stabilize, but apparently skepticism abounds, as shares are the weakest performer on the Dow near the close.
- CFO Martin Schroeter reiterated IBM's EPS target for 2015 of “at least $20,” a matter that was scrutinized by the Street in reports leading up to the meeting.
- Barclays analyst Ben Reitzes writes that the points discussed today are about as expected, but he's more concerned with cash flow than with the EPS goals; IBM's free cash flow has trended below non-GAAP EPS for the last two years, which could point toward longer term problems, and Reitzes sees $16B free cash flow guidance as challenging considering how much it must need working capital improvements to hit that figure.
Tue, Apr. 29, 9:47 AM| 17 Comments
Wed, Apr. 23, 3:31 PM
- Squashing rumors he's turned sour on IBM, Warren Buffett - appearing on CNBC - says he's not surprised by the company's weak Q1 results. He hasn't sold a share of the stock, he says, and expects to add more to his holdings. The stock has run about $0.50 higher on the Oracle's comments, now back to flat on the session.
IBM vs. ETF Alternatives
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