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Why Microsoft and IBM Jumped

By Ashraf Eassa - Jul 20, 2014 at 3:30PM

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Find out what drove Microsoft and IBM up.

It was generally a good week for the S&P 500 ( ^GSPC 2.07% ), which edged 11 points higher as earnings season has been generally positive so far. S&P tech giants Microsoft ( MSFT 2.68% ) and IBM ( IBM 1.39% ) were worth a closer look this week. 

Job cuts and Intel results driving enthusiasm for Microsoft
Microsoft, the software giant well known for its Windows operating system and Office productivity suites, announced that it will lay off up to 18,000 of its 127,104 employees. Approximately 12,500 of these positions will be from the software giant's freshly acquired Nokia handset division. 

Investors were pleased with this announcement, driving shares up by as much as 3.7% during Thursday's trading session (and up 6.1% for the week). Note, however, that Bloomberg reported these rumors on July 15 and Nomura's Rich Sherlund had issued a note on July 11 claiming that layoffs were imminent, so this headcount reduction may have already been baked to some extent into the stock. 

Further, chip giant Intel reported results that showed strength in the business PC space as well as the datacenter. This bodes well for Microsoft, as it is not only exposed to the PC side of things with Windows and Office, but it is also exposed to the datacenter with its multitude of server- and cloud-based products, such as Windows Server, SQL Server, and Azure. 

Microsoft is slated to report its third-quarter results after the close on July 22. 

IBM still a cash-generating machine
Technology giant IBM reported its earnings results after the close on Thursday. Revenue came in at $24.36 billion, edging out analyst consensus by $230 million. Earnings per share was $4.32, beating consensus by $0.03. Full-year earnings per share of at least $18 was reiterated, pushing past the $17.87 consensus. 

While revenue growth for the technology giant has been elusive, with revenues down 2% in the most recent quarter (1% excluding the company's divested customer-care outsourcing business), the company managed to drive diluted earnings-per-share growth of 42% year over year and net income up 28%. This net income growth appears to be driven by lower operating expenses (down 14% year over year) and slightly higher gross profit margins. Earnings-per-share growth outpaced net income growth, as the share count dropped 9% from the year-ago period because of buybacks.

Though IBM will eventually need to return to revenue growth if is to drive net income up meaningfully in the longer term (cost-cutting only takes you so far), the stock isn't exactly priced for growth at just under 11 times this year's expected earnings. Further, the consistent and aggressive buyback program will help drive earnings-per-share growth even if net income remains flat. 

IBM's shares finished the week up 2.4%. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,686.75 (2.07%) $95.08
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$121.58 (1.39%) $1.67
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$334.92 (2.68%) $8.73
Nokia Corporation Stock Quote
Nokia Corporation
NOK
$5.90 (3.69%) $0.21
Intel Corporation Stock Quote
Intel Corporation
INTC
$52.57 (3.10%) $1.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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