Shares of IBM (NYSE:IBM) rose 18.3% higher in January, according to data from S&P Global Market Intelligence. Big Blue followed the general market higher throughout January and then booked a 10% jump in a single day on the strength of a solid fourth-quarter report.
IBM's fourth-quarter revenues fell 3% year over year, landing at $21.8 billion. Adjusted earnings shrank 6% to $4.87 per diluted share. Both of these metrics turned out slightly stronger than Wall Street's consensus estimates despite a significant currency exchange headwind that wasn't part of IBM's guidance nor of analysts' projections.
It's been five long years since IBM started shedding hardware operations in favor of cloud computing and data analytics, but the strategy shift appears to have bounced off the bottom of that elongated trough. The IT services giant is boosting its cloud computing operations through the $34 billion buyout of open-source software veteran Red Hat (NYSE:RHT), which is expected to close in the second half of 2019.
Management expects free cash flows to hold steady this year while adjusted earnings should post a small increase. Those targets don't include any projected contributions from Red Hat because that company brings a significant amount of financial heft to its future parent company. Over the past four quarters, Red Hat collected $3.3 billion of top-line revenues and $978 million of operating cash flows. The exact timing of the final John Hancocks can make a big difference to the sales and profits IBM can book from Red Hat's operations in 2019.
As an IBM investor, I'm excited to see how Red Hat's innovative products and business practices will fold into Big Blue's large-scale operations. IBM's shares remain dirt cheap, trading at just 11.5 times trailing earnings.