Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



IBM Slashes 74 Points Off the Dow

International Business Machines (NYSE: IBM  ) is changing its business model under new leadership. Last night's third-quarter report showed some of the growing pains you might expect from a fundamental strategy shift, and IBM shares took a 6% haircut overnight. IBM's price drop alone removed 74 points from the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . In other words, IBM's report turned an otherwise positive Dow Jones day into a loss.

This is what International Business Machines' revenue and income trends looked like heading into this report:

IBM Revenue TTM Chart

IBM Revenue TTM data by YCharts.

The fresh numbers included sales of $23.7 billion, down 4% year over year. Net income increased 6% to $4 billion, and IBM's generous share-buyback program boosted earnings per share to 11% year-over-year growth. To complete the chart above, you'd pencil in another quarter of slowing sales, while the net-income line trends slightly northward.

IBM's core divisions all reported mild sales dips, from software to services to hardware. Server systems sales plunged 17%, led down by weak mid-tier systems. Old-school System Z mainframe sales actually improved by 6%.

Rampant growth in healthy, but still-small operations couldn't quite make up the difference this time. Cloud-computing sales soared 70% higher, and IBM's Smarter Planet infrastructure project rose 20% -- but again, neither operation is even big enough to make IBM report their actual sales numbers on a quarterly basis. They're long-term plays, not current business-drivers.

IBM's shifting emphasis is hurting the business right now, at least on the top line. It may take several years before the cloud and Smarter Planet projects start pulling their weight, taking the "core business" crown from today's software, servers, and services triumvirate. These transitions are always tricky. Investors have fled International Business Machines in the last six months, and today's 6% plunge brings the half-year return to -17%, while the Dow has gained 5%.

If you can't stand the heat, get out of the kitchen.

On the other hand, long-term investors like your average Fool may reach a completely different conclusion. IBM is managing this strategy shift with a long-term plan in mind, and the bottom line never suffered from the weaker revenue. The third line in the chart above shows that IBM shares currently trade at P/E ratios not seen since 2010.

Personally, I'm tempted to take a real-money position in International Business Machines once our Foolish trading and disclosure policies allow me to touch the stock again. How often do you get a historical 15% discount on a sector leader with more than a century of operating history and an honest-to-goodness long-term plan underway? Add IBM to your Foolish watchlist if you want to stay on top of my IBM moves.

No promises, but I'm kind of drooling over here. Soon enough, I think IBM will get back to driving the Dow higher, rather than holding the index back.

Can IBM Help Me Retire Rich?
The best investing approach is to choose great companies and stick with them for the long term. IBM most certainly fits that bill, but it's not your only long-term option. The Motley Fool's free report "
3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2688072, ~/Articles/ArticleHandler.aspx, 9/30/2016 9:59:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 43 minutes ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 5:01 PM
^DJI $18308.15 Up +164.70 +0.91%
IBM $158.85 Up +0.74 +0.47%
IBM CAPS Rating: ****