IBM (NYSE:IBM) ended 2019 on a solid note as the market seems to slowly get more confident in the sales trajectory of the firm, while the legacy business continues to provide great cash flows, largely distributed to investors.
A year ago, I concluded that IBM was seeing more sluggishness, yet surprised the market with a solid guidance for 2019, despite the dilution incurred following the $34 billion deal for Red Hat. That guidance was a bit too optimistic, which does not really come as a surprise, yet low expectations and a strong market have been the reasons why shares have held up quite well.
Fast forwarding a year later, shares trade with reasonable gains, while the underlying business continues to struggle in a big way.
The Old Thesis
In January of last year, IBM was quick to release the fourth-quarter results for 2018 which revealed a 3.5% fall in sales, marking a small decline in annual revenues, with trends definitively weakening in the final quarter of the year. The company reported GAAP earnings of $9.57 per share and adjusted earnings of $13.81 per share. The gap between both metrics has been quite large, driven by items such as tax, acquisition charges, and post-retirement charges.
Trading in the $120s, multiples were non-demanding, yet IBM was not showing growth either. The balance sheet was traditionally very complicated. Based on cash and regular financial debt, IBM operated with a net debt load of $33.6 billion. At the same time, IBM has a large financing business with $31.5 billion in financing receivables. Net debt falls to $2 billion if we include these receivables. If we then add back the large pension retirement liabilities, net debt will increase to $15 billion.
As the Red Hat deal had not closed already, net debt would jump by about $34
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