Billing itself as "the largest financial services group in Northern Europe," Sweden-based Nordea has a host of diversified banking operations, including managing approximately $25 billion under its Nordea Investment Management unit. As has been the case for several quarters now, Nordea's second-largest portfolio holding is IBM (NYSE:IBM).
In fact, after selling some 168,000 shares in 2014's Q2, Nordea turned around and added to its IBM position last quarter, bringing its portfolio weighting up to 2.64%, a hair behind its largest holding, Johnson & Johnson's 2.74%. With 3.47 million shares, Nordea clearly sees something in IBM some investors -- based on its double-digit share price drop since announcing earnings on Oct. 20 -- have opted to ignore. But there's some method to Nordea's madness when it comes to its IBM position, and long-term investors in search of value would be wise to take notice.
The not-so-good news
The day before IBM announced Q3 earnings its stock price was trading at a respectable $182.05 a share. Not quite 52-week high territory, but arguably a fair value at the time considering IBM CEO Ginni Rometty and team are in the midst of a significant shift in business focus, which takes time, particularly for a company of IBM's size with entrenched, outdated technologies. Then the other shoe dropped.
Non-GAAP (not including one-time items) earnings per share declined 10%, IBM's net income of $3.7 billion in 2014's Q3 was 18% less than the year prior, and tellingly, margins actually decreased -- which didn't bode well for Rometty's expense cutting efforts. Its transition to new products and services played a role, but lower overhead, which has been IBM's goal for some time now, should result in better margins, but that wasn't the case in Q3. In fact, last quarter included a surprising increase in IBM's expenses compared to 2013.
As if IBM's financials weren't bad enough, Rometty was essentially forced to admit what many IBM'ers already knew: the long-standing goal of hitting $20 a share in earnings by next year isn't going to happen. Not Rometty's fault, per se, as that was an objective her predecessor put forth as far back as 2010, two years before Rometty took the helm. Nonetheless, added to IBM's dismal Q3 financial results, facing up its 2015 earnings "miss," added fuel to what was already a good-sized fire.
Unfortunately, it gets worse for IBM, at least in the near-term. According to CFO Martin Shroeter, IBM shareholders shouldn't expect earnings per share guidance in the foreseeable future, giving naysayers more ammunition to speculate about the downfall of IBM.
Hold on a second, here
With so much negativity, why would an institution the size of Nordea put so much weight in IBM, keeping it the second largest holding of its $25 billion under management? There are likely several reasons, one of which is a basic investment premise: Selling in panic, as many IBM investors clearly have of late, is a recipe for disaster. That's particularly true in IBM's case, because there's more to the story than the impact of declines in its hardware and PC-related businesses.
Unlike Microsoft (NASDAQ:MSFT), one of its primary competitors in the all-important cloud race, investors have yet to buy-in to IBM's transition. As Microsoft shareholders enjoy its 30% jump in share price year-to-date, largely because of its $4.5 billion annual cloud revenue run-rate, IBM's $3.1 billion cloud run-rate -- up from Q2's $2.8 billion -- has elicited little more than a yawn. The same "ho-hum" attitude applies toward the expected jump in IBM's cloud revenues to $7 billion next year, $4 billion of which will come from new sales, while $3 billion will be a shift of existing services to the cloud.
What Nordea recognizes, and long-term investors should consider, is IBM's cloud, big data, business intelligence, and mobile plans -- in other words its "strategic imperatives" -- are beginning to show signs of life, just as Microsoft's transition is. Remember, Microsoft couldn't buy a friend last year, let alone a horde of investors tripping over each other to buy its stock. IBM is in the same boat, but it hasn't found its mojo, yet. When it does, Nordea's bet on IBM will turn out to be well worth the wait.