Earnings season is upon us and companies are now reporting on their late summer financial results in earnest. Stock prices can go wild during these periods as companies post figures that either beat or fall short of investor expectations. But these short-term reactions don't mean it's time to bail on solid stocks. Three tech names that recently reported are IBM (IBM 0.44%), Duck Creek Technologies (DCT), and Lam Research (LRCX -0.39%). Here's why three Fool.com contributors think they're worth owning.
The new IBM puts up weak sales numbers... for now
Nicholas Rossolillo (IBM): Ahead of the Nov. 3 spinoff of its managed infrastructure business (which is now called Kyndryl), IBM reported results that fell short on some fronts. Earnings per share of $2.52 beat the consensus analyst expectation by a penny, but revenue of $17.6 billion was shy of the $17.8 billion consensus. Shares fell nearly 10% following the update.
No bother, though. If you're looking for a solid income generator with some gradual stock price growth over time, IBM is still a good pick. The culprit for much of the lackluster financial update was the managed infrastructure business that will soon be separated from IBM, which was still reporting under the "Global Technology Services" segment in Q3. That segment's revenue fell 5% year over year to $6.15 billion. As a result, total revenue was up just 0.3% from last year. Ex-Kyndryl, though, IBM said it grew overall sales by 2%.
Granted, 2% growth is short of the mid-single-digit percentage rate of revenue expansion management said to expect from the new IBM post-Kyndryl spinoff. The company said it's still working on tidying up to meet that stated goal. But the company is nonetheless already delivering on its free cash flow generation outlook.
Excluding non-recurring charges of $566 million in Q3 related to separating Kyndryl, IBM's free cash flow would have been up 6% from last year. Free cash flow generated over the last 12-month stretch totaled $9.22 billion (after subtracting $1.84 billion in Kyndryl charges), valuing this old tech firm at just 10 times free cash flow.
Put another way, IBM remains highly profitable, and profit margins will dramatically improve even more once the legacy operations of Kyndryl are independent. IBM generates ample free cash to service its dividend, which currently yields 4.6% after the most recent sell-off. If investment income is what you're after, this is still a stock worth buying following the Q3 report.
Image source: Getty Images.
If it walks like a growth stock and quacks like a growth stock...
Anders Bylund (Duck Creek Technologies): Insurance software specialist Duck Creek Technologies may be the most interesting company you've never heard of. The company has been around for two decades, by turns as an independent business and a part of professional services giant Accenture (ACN 0.02%). Duck Creek reentered the public market in the summer of 2020, capping a strategy update that transformed the company into a pure software-as-a-service operation.
Since then, the company has delivered year-over-year revenue growth in the 20% range while lifting the bottom line closer to positive territory. The veteran company's young stock traded largely sideways for more than a year, until the fourth-quarter report hit the newswires on Oct. 14.
True to firm, Duck Creek posted adjusted earnings of $0.02 per share on top-line revenues of $70.9 million. Your average Wall Street analyst would have settled for $0.01 per share and $69.1 million, respectively.
And the stock plunged 22% lower the next day.
That market reaction is just silly. Sure, Duck Creek issued full-year guidance just below the Street consensus for the just-started 2022 fiscal year. That's enough to make some investors look elsewhere, no further questions asked. But Duck Creek's results have been consistently above the high end of management's guidance ranges all year long, and I see no reason why management's conservative guidance habits would end here.
This company offers SaaS tools to manage property and casualty insurances, spanning the entire life cycle of insurance policies with an eye toward customizing the Duck Creek OnDemand platform to the needs of each specific client. Business is booming and the stock looks much more affordable after last week's dramatic haircut.
In many ways, Duck Creek's combination of a long operating history and affordable shares makes it a more attractive buy today than fellow insurance technology maven Lemonade (LMND 1.40%), which I already own. Adding a couple of Duck Creek shares to my portfolio makes a lot of sense right now.
Investors are mistaking supply chain constraints for the end of the semi cycle
Billy Duberstein (Lam Research): Lam Research's stock fell after its recent earnings report, but these discounted prices may not last long, giving investors the opportunity to buy this top-tier semi equipment supplier with one of the highest returns on equity in the market. The stock is now much cheaper than many tech peers and even trades at a discount to the overall market, at just 16 times this year's earnings estimates.
In the September quarter, Lam beat earnings expectations, but missed on revenue and gave softer-than-expected guidance. Investors seem to be debating whether this marks a turn in the semi-cycle, or whether the muted results are merely the result of supply chain constraints. Management was very clear that the supply chain was the culprit on the conference call with analysts, and it's been well-documented that supply chains are jammed up all over the world, affecting a broad swath of companies. So, it appears supply chain is the main problem.
Naturally, when a company misses on the top line, the market usually doesn't take kindly. That's especially true of semicap companies that have been somewhat cyclical in the past. For these companies, some of the investor base is likely playing the cycle, and may jump off at the earliest sign of deceleration.
But if the miss is supply-oriented, which it appears to be, it would actually mean the current upcycle would remain strong for a longer period of time, as unfilled orders today eventually get filled later on. CEO Tim Archer said in response to an analyst question:
I would say lead times have stretched out to the point where our visibility into demand into '22 is better than usual. And so I don't think that the types of initial indicators [of a cyclical downturn] that you're talking about are things we're seeing right now. We feel much more constrained by supply chain challenges and ability to meet shipments than an over-shipping situation.
Lam also now has the ability to repurchase more shares at discounted prices, which could look mighty smart a few years out. Last quarter, Lam repurchased $1.24 billion, even more than the $1.18 billion in made in net income.
Lam also raised its dividend by 15% recently. So, management is generously rewarding shareholders, returning over 100% of its free cash flow this year. While management teams can make mistakes, Lam's leaders appear quite confident semicap equipment demand will continue to grow next year and beyond, even though sales are already up strongly in 2021.
That's because digital transformation is now an imperative coming out of the pandemic, causing a global increase in demand for semiconductors. And given that each semiconductor node progression is becoming more capital-intensive, equipment companies serving leading-edge manufacturers are set up very well for the rest of this decade -- yet these stocks tend to trade cheaply to the market. That's a pretty good position for Foolish long-term investors to be in.
