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



For IBM Corp., Shortsightedness Rules the Day

When IBM (NYSE: IBM  ) announced earnings on July 17, its stock was trading at $192.49 a share, or what amounted to a slightly less than 3% gain year-to-date. After demolishing year-over-year earnings, and demonstrating outstanding growth in the key areas that CEO Ginni Rometty has a laser-like focus on, IBM shares dropped to $190.85 by the close of trading this past Monday. What?

Oh, there are reasons for the ho-hum response by the market following IBM's earnings release.  Just ask the legion of analysts who are lamenting Big Blue's results. However, the reasons for so much negativity, particularly directed toward an industry leader in the midst of a significant transition, speaks more to analysts' and investor's unwillingness, or inability, to look beyond next week. This is good news for long-term investors in search of an inexpensive addition to their portfolio.

The "bad" news
IBM is hardly alone when it comes to bellwether tech giants getting no respect in the midst of a game-changing reorganization. Just ask Microsoft (NASDAQ: MSFT  ) CEO Satya Nadella. Like IBM, Microsoft is in the process of reinventing itself, and despite posting more than respectable results for its recently announced fiscal Q4 2014, it's receiving only a lukewarm response from investors. But Microsoft's tepid reception would be a breath of fresh air to IBM, who can't seem to garner even the slightest of good tidings.

Despite some perceptions, there's a lot to like about IBM's recent quarter. IBM's earnings, a measure that usually carries a great deal of weight in the minds of investors, were off the charts. In Q2, IBM generated earnings-per-share, or EPS, of $4.12, a 42% jump from the same period last year.

Recent lay-offs and some belt-tightening resulted in a 15% decline in expenses for the quarter, and IBM went on to announce non-generally accepted accounting principle, or GAAP,  earnings for the year are expected to come in around $18 a share. Rometty has said many times her objective is to generate $20 a share in earnings by 2015 and if this year finishes as expected, IBM would appear to be on pace.

But where IBM really excelled was where it mattered, in its "strategic growth initiatives." Cloud, big data, and mobile revenue results are what investors should be focused on, similar to its longtime competitor Microsoft and its emphasis on "mobile-first, cloud-first." For IBM, cloud revenue rose over 50% in Q2, and is now tracking at nearly $3 billion annually. That still trails Microsoft's more than $4.4 billion annual cloud-related revenues, but the two old foes are squaring off for a new, 21st century battle. Just like old times.

Now add a 100% improvement in mobile revenues and increases in both business analytics -- big data -- and security-related sales, and you're left with what was a sound quarter for IBM.

What's not to love?
The biggest problem analysts had with IBM's quarter was its flat, to slightly down, total revenues. At $24.4 billion, IBM's sales dropped 1%, adjusting for the divestiture of a customer service unit. The culprit was IBM's hardware business. In a slowly stabilizing PC market, hardware sales declined over 11% compared to last year.

Other "issues?" The growth in earnings per share, or EPS, it could be argued, was the result of IBM's share buyback plan, as well as its aggressive cost cutting initiatives. Both efforts supposedly just masked a lack of revenue growth by IBM.

Final Foolish thoughts
IBM's effort to streamline operations and better align its workforce with cloud technologies, big data, and mobile isn't some kind of smokescreen, they were much-needed steps as Rometty changes the way IBM does business. Microsoft is in the same boat, which is why Nadella announced its largest job cuts ever: 18,000 by year's end.

If you're focused on IBM's total revenues, like many analysts are, it's not a suitable investment right now. Nor is Microsoft, for that matter. But if you're looking for long-term growth at a bargain, IBM has a forward price-earnings ratio of a mere 9.80 -- not to mention a decent dividend yield of 2.27%. For those that are more concerned with next year than next week, IBM is an absolute steal.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (4)

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.

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: 3040670, ~/Articles/ArticleHandler.aspx, 9/1/2015 10:32:43 AM

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...

Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

Today's Market

updated Moments ago Sponsored by:
DOW 16,191.84 -336.19 -2.03%
S&P 500 1,929.71 -42.47 -2.15%
NASD 4,694.90 -81.61 -1.71%

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

9/1/2015 10:17 AM
IBM $143.88 Down -4.01 -2.71%
International Busi… CAPS Rating: ****
MSFT $42.32 Down -1.20 -2.76%
Microsoft CAPS Rating: ***