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Why IBM Shares Are Falling Today

By Anders Bylund – Apr 18, 2018 at 12:10PM

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Big Blue left investors feeling, well, blue following an unconvincing earnings report.

What happened

Shares of IBM (IBM -0.82%) are crashing today, down 7.8% as of 12:45 p.m. EDT, after the computing veteran's first-quarter report was ill-received by investors, even though the results exceeded your average analyst's estimates.

So what

In the first quarter of 2018, IBM's top-line sales rose 4.9% year over year to land at $19.1 billion. The analyst consensus had pointed to $18.8 billion. Further down the income statement, adjusted earnings edged 2.9% higher to $2.45 per diluted share. Here, the Street would have settled for $2.41 per share.

So why the market rancor? Well, IBM's gross and operating margins tightened and came in below expectations. The earnings surprise was only possible thanks to a $810 million one-time tax credit, which resulted from the settlement of several pending tax audits around the globe. Many investors feel that earnings based on non-repeatable tax windfalls ring hollow, undermining the bottom-line value of this quarter's results.

IBM's iconic blue-striped logo.

Image source: IBM.

Now what

Digging into the pre-tax performance, operating expenses rose faster than revenue due to currency exchange headwinds and costly restructuring actions. The currency effect belongs together with a tailwind to the top line, which played a large part in driving IBM's revenue above expectations. Taken together, these two effects cancel each other out before reaching the bottom line.

The reported results did not change IBM's earnings projections for the full fiscal year, which should match or exceed the adjusted profits of 2017. The high-growth business operations under IBM's "strategic imperatives" banner now account for 47% of the company's total sales and are growing at an annual rate of 24%.

Today's sudden haircut makes sense, because IBM would have missed Wall Street's earnings targets if not for that convenient tax benefit. But the business keeps moving in the right direction overall, and it's not wrong to treat this discount as a buy-in window, either. This report may have been bad for short-term speculators, but looks just fine for us long-term investors.

Anders Bylund owns shares of IBM. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.

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