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What's Wrong With IBM in 2013?

The Dow Jones (DJINDICES: ^DJI  ) index has surged more than 20% higher so far in 2013. It's a rare week when the Dow doesn't set a fresh all-time high nowadays, and the index jumped to another record high today.

But the Dow's rising tide is not lifting every boat in the dock. In particular, it's leaving one big, blue ship (chip?) behind. IBM (NYSE: IBM  ) shares are trading lower year to date. What's wrong with IBM this year?

First up, IBM is working under a brand-new CEO. Longtime leader Sam Palmisano retired at the very start of 2013, handing the reins over to his vice president of sales and marketing, Ginny Rometty. Having risen through the IBM ranks as head of consulting services, it's no surprise to see Rometty recast IBM in a more software- and service-focused mold.

But change is always difficult, and even perfectly executed changes of a long-term vision can hurt in the short term. In this case, the execution hasn't been perfect and IBM also ran into some headwinds out of its control. U.S. government orders have been soft due to sequestering and budget shutdowns, and an unexpected dry spell in China didn't help IBM's cause either.

The result: A company that hadn't missed an analyst earnings target since 2005 suddenly shanked three quarters in a row. To nobody's surprise, IBM's shares followed suit.

IBM Chart

IBM data by YCharts.

IBM's earnings are taking a break from their recent history of rapid growth, and top-line revenues are actually shrinking. The good news is, Rometty's IBM is actively choosing to drop low-margin contracts in favor of more profitable deals when possible. This tactic explains the flagging revenue trend, and also leads to stronger profit margins.

IBM Revenue (TTM) Chart

IBM Revenue (TTM) data by YCharts.

2013 was a mixed bag for IBM but a downright bummer for IBM shareholders. As Ginny Rometty's revamped strategy rolls out, it's fair to say that 2013 was a transitional year in Big Blue's century-plus history.

What's next for IBM investors?
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. As the "dogs of the Dow" often do, IBM could be primed for tremendous gains in 2014 if Rometty's vision works out as planned. The Motley Fool's chief investment officer has just hand-picked another next-year growth opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

Read/Post Comments (2) | 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.

  • Report this Comment On December 06, 2013, at 8:02 AM, Mathman6577 wrote:

    One year is not enough time to count out a company like IBM. It will ride out the storm. It still returns value to investors.

  • Report this Comment On December 06, 2013, at 10:04 AM, fernana1 wrote:

    Not sure if this was a buff piece or actual analysis but it misses the real point of what is happening with IBM and that this isn't a short term issue.

    In the effort to meet "shareholder value" and the 2015 roadmap IBM has been gutting and cutting back internally (movement of salary increases and 401k to year end) to the point where there's nothing left to throw overboard. Available cash flow has been used for acquisitions and stock buy backs to "grow" EPS.

    Ginny isn't betting on software and services she is betting on the cloud and SmarterPlanet efforts to lead the way for IBM. The recent CIA contract provides insight into how successful that effort may ultimately be long-term.

    Investors need to take a hard look at the true value within IBM and what will be left in 2015 versus how much the stock was boasted by managements efforts to meet those targets.

    There seems to be more downside then upside.

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9/27/2016 4:45 PM
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IBM CAPS Rating: ****