How Long Must Investors Wait On IBM?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Technology bellwether IBM (NYSE: IBM) understands that its shareholders demand growth ... something the company has failed to produce in sufficient quantities. IBM has been doing its best to quench that hunger by opening up its wallet to the extent of $16 billion worth of acquisitions over the past 5 years.
But investors have grown impatient. On the heels of its recent earnings report, investors have begun to wonder if the company will ever be able to produce the sort of returns they have come to expect.
The Surprise that was Expected
For the third quarter, IBM reported earnings per share of $3.33 on revenues of $24.7 billion. Though EPS climbed 4.4% from the year ago quarter, the figure fell short of analysts’ expectations of $3.61 per share. Likewise, revenue also disappointed Street forecasts of $26.28, as it declined 5.4% year over year.
This is the second consecutive quarter in which sales have shown signs of deterioration. Likewise, with company’s net income experiencing a shortfall, this ends its streak of year over year profit growth, which spanned four quarters. As disappointing as these numbers were, they weren’t all that surprising, as the Street had anticipated weakness in IBM’s hardware business, which fell 12% from the year ago quarter.
That the company was able to improve profit margins by 90 basis points despite this fact was pretty impressive. Nonetheless, this wasn’t enough to appease investors. But management did a decent job of selling what good news could be taken from the report. IBM Chairman and CEO Ginni Rometty described the company’s growth efforts by saying that it is focusing on “higher-value businesses, strategic growth initiatives and productivity."
However, with these substandard results, it has caused investors to wonder if its acquisition strategy (among other moves) is really working. If there were some positives out of the report, it was that IBM continues to perform well in its software business, which climbed 3% year over year. But this was offset by the expected feeble hardware performance, as well as flat services revenue.
It does seem, however, that the company’s fourth quarter is looking a bit more favorable. In that regard, average estimates have inched up a bit to $5.27 per share from $5.18, while estimates for the fiscal full year also climbed from $15.01 to $15.13. These projections support the company’s goal of reaching $20 per share by 2015.
It seems analysts are looking at the poor revenues in the third quarter and feeling that product launches are likely to pick up in the coming months. The possibility does exist that customers might have postponed purchases in anticipation of IBM’s new product lineup. This seems to support statements made by the company, where it made references to “rollover deals,” which IBM expects to drive sales in the fourth quarter.
I’ve always liked IBM as a company and a stock. While the company deserves credit for improved earnings over the past several years, it is hard to fall in love with IBM today on the heels of two consecutive sub-par performances. To date, the stock has risen 15% on the year. But share buybacks as well as growing multiples have contributed to these premiums. Consequently, I think at $195 the stock is fairly valued and I don’t see any near-term catalysts to change my opinion on this. But should it fall below $190, then I might be forced to reconsider.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.