A Big Blue Stock Market Hero

Newsflash for those who think that tech is the new banking: IBM (NYSE: IBM  ) earlier today pre-announced earnings that handily beat estimates.

Third-quarter profits rose 22% to $2.05 per share, easily besting the consensus estimate of $2.02 per share. Revenue, on the other hand, was lighter than expected at $25.3 billion, up 5% year over year, and 3% of which was attributable to currency effects. Analysts had projected $26.5 billion in Q3 revenue.

A Goldman Sachs analyst said in a report that the shortfall is telling, indicative of a slowdown "in virtually all of tech's key end markets." Presumably, he's referring to the same slowdown that sunk shares of SAP (NYSE: SAP  ) and Oracle (Nasdaq: ORCL  ) earlier this week.

But should we really be so dismissive of IBM's quarter? Our 115,000-plus Motley Fool CAPS community isn't so sure:

Metric

IBM

CAPS stars (5 max)

***

Total ratings

2,824

Bullish ratings

2,485

Percent Bulls

96.3%

Bearish ratings

339

Percent Bears

3.7%

Bullish pitches

353

Bearish pitches

62

Data current as of Oct. 9, 2008.

And yet there are detractors. CAPS All-Star jwfoster in February wrote:

Pre-margined shares with a debt financed buyback. This place is a financial engineering fiasco in the making. Not a well run technology company. With all the debt being piled on to buy shares to marginally up guidance this company is a huge accident waiting to happen.

An accident waiting to happen? Wow. I couldn't disagree more. It'd be one thing if IBM was new at this, but Big Blue has been carrying debt on its books for the last decade. Most of it is financing; debt related to software and equipment purchases by customers.

Remember, too, that IBM traditionally produces superior returns on invested capital:

Year

ROIC

Trailing 12 months

18.1%

2007

16.1%

2006

15.3%

2005

11.7%

2004

12.7%

2003

12.2%

2002

9.9%

Data current as of Oct. 9, 2008.

Value is created when the returns on capital exceed the cost of capital. IBM's debt costs range from as little as 1.50% to as much as 8.375%, but nowhere near double digits. The implication? Big Blue is a value creator.

It's fair to ask how IBM is managing its debt and cash flow in the midst of a credit crunch that's forced AAA-rated debtors like General Electric (NYSE: GE  ) to raise capital. It's also fair to ask whether lower-than-expected revenue means that large capital spending projects are being pushed back. But it's pure panic to assume that an amorphous "tech slowdown" will engulf a company that just reported higher margins and improving free cash flow.

Wake up, Wall Street.

Get your clicks with related Foolishness:

Fool contributor Tim Beyers owned shares of IBM and Oracle at the time of publication. He hunts for the best of tech as a member of the Motley Fool Rule Breakers team. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Dell is an Inside Value pick. The Motley Fool's disclosure policy is worried but not panicked.


Read/Post Comments (2) | Recommend This Article (3)

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 October 11, 2008, at 11:21 AM, jwfoster wrote:

    The debt that is of concern is the debt they issued to do share buybacks. Not debt associated with financing of product.

    Shareholders have allowed IBM to put bondholders between themselves and the company as IBM has leveraged its balance sheet to reduce its outstanding shares. The growth in EPS has predominantly been a function of reduced shares from a debt financed buy-back and FOREX benefit from a declining dollar. In addition, they have frequently adjusted revenue recognition models as the company, similar to financial institutions, is a bit of a financial black box when it comes to accounting.

    While they have reported numbers that appease Wall Street, the focus at IBM has been on appeasing Wall Street rather than running the company for long term value. In the end, we will see if that approach serves shareholders in the long term.

  • Report this Comment On February 02, 2009, at 3:03 AM, BryceZ wrote:

    Even in today's volatile market, ad likeability should have a positive effect on stock prices of companies advertising during the Super Bowl broadcast. The first step for you to understand the stock market is to understand stocks. A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company. Most people wouldn't think to get a payday loan to buy stocks with – but you may want to think about it, or at least buying some stock next Monday. Monday itself won't be important, because the day before is Super Bowl Sunday, and most people will be watching the Super Bowl ads. Typically, if a Super bowl ad is well received, the price on the stock market for shares in that company goes up, faster than you can get a payday loan. Good news for Wall Street, because the market has dropping so much that those boys might need a <a title="READ Stock Up on Super Bowl Stocks | By Your Payday Loan Source" rev="vote-for" href="http://personalmoneystore.com/moneyblog/2009/01/30/stocks-su... loan</a> for their next gold-plated back scratcher

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