International Business Machines (IBM): I’m Buying

Posted on Oct 21 2015 - 9:54am by Sharpe Trade

Yes, you read that right.

When it comes to International Business Machines (IBM)?  I am a buyer.

But not at the present time.

Yes.  That title was simply to grab views.  No, I am not buying more IBM right now.  

Sue me.

First, let’s review the conference call.

For years, I have stated that new retail investors should tune into companies quarterly conference calls, presented to Shareholders. The benefits are numerous and many.

It only generally takes one hour or so, every three months.

One can become familiar with the business with which one is invested.

One can listen to the board members of various corporations around the planet, as they attempt to manage businesses worth billions of dollars. You’re not listening to some doofus and his thoughts on the economy who has no stake in issues facing the economy. You’re not listening to my thoughts on the economy. You are listening to board members discuss the very real issues they face as they manage corporations worth billions.

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. Perhaps, we can make this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the Sharpe Income project.

International Business Machines (IBM) reported earnings on the 19th of October, after which the stock’s price dropped about 5.7%. As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts.

International Business Machines (IBM) – Daily Chart

IBM-Chart-10-21-2015

So what’s ‘the low-down’?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call … .

International Business Machines (IBM) – October 19, 2015

  • $3.30(1) Est. / $3.34 in Actual EPS.
  • Net Income … 2.95 Billion in Net Income, down from 3.5 Billion last quarter and 3.45 Billion one year ago.
  • Earnings per share (EPS) of $3.34 down from $4.32 from the same time last year and down from $3.84 last quarter.
  • Revenue of 19.28 Billion, down from the same time last year.
  • 2.5 Billion of Free Cash Flow.
  • Started off, right off the bat, presenting the reasons for the revenue drop.   Which really sort of annoyed me.  We all know about the shift from legacy to the new strategic imperatives.  If you’ve been on ANY IBM call for the last 3 years, you know about the strategic imperatives.  I didn’t need that pointed out to me … again.  What annoyed me was not starting off with even the nominal amounts of revenue, income and EPS.  Nothing.  I found it within the slides and the release data.  They started off “We’re moving away from older businesses, and this took a little longer this quarter” and the excuses ensued.  I know you are moving away from older businesses.  Everyone knows.  And while the reasons for missing revenue expectations due to the strategic shift may possibly be good reasons, I thought the method of presentation of that information was just awful.
  • Then we hit the biggies.  Guidance on EPS cut to $14.75 to $15.75.
  • The second ‘biggie’ … Free cash flow expected to remain flat year to year.  Which, is a different tune than they sang last quarter.  Last quarter they had stated they expected to see Free Cash flow move higher throughout the remainder of the year, and now we have a reversal on that statement.
  • Now .. for the Strategic Imperatives, YTD the revenue growth is 30% year to date, and was up 27% in the 3rd quarter.
  • Cloud revenue up 63% through three quarters, with 12 month revenue at 9.4 Billion, and a service run rate of 4.5 Billion.
  • Analytics revenue up 20% year to date, and has doubled over the last year.
  • Security business up 12%.
  • Social business up 40%.
  • Mobile business quadrupled.
  • U.S. down 4%.
  • Japan and Germany posted strongest growth, with Japan showing consecutive quarter on quarter growth.  UK, France and Canada also saw growth.
  • BRIC’s were down last quarter by 18% and this year, BRIC’s down 7%.
  • So major markets were down 1% and Growth markets down 3%, with BRIC down 7%.  Although counting from this time last year, BRIC’s are seeing an improvement.
  • Gross Margin up 0.8% and the biggest driver there is Systems Hardware.
  • Services Segments overview was at around 12:00 minutes on Slide 8.
  • Again claiming currency impact.  My thoughts:  Currency impact is starting to become an issue with me.  Listen, USD/JPY was down all quarter.  The U.S. Dollar was flat, to slightly down for the quarter.  So I’m growing a little tired of the ‘currency impact’ theme from IBM.
  • Questions and Answers: Second question really boiled down to the time the transition is taking, and all of the headwinds.  Absolutely bang-on question.  How long can this transition continue to last with all of the head-winds we are looking at?  And quite frankly … I was put off by the answer.  The currency impact theme … well … it’s growing to be a bit of a stale response with me.  IBM is a ‘smart cognition’ company correct?  ‘Watson’ and all like that, right?  You can’t adjust, even given your size … to currency impact when the U.S. Dollar peaked in March of 2015, and has been dropping ever since?  They stated they are not attempting to be the largest competitor, but the best in value in their strategic shift.

As I mentioned at the outset, the title was just a title.  No, I am not buying more IBM at the present time.  Are you kidding me?

However, I will continue to hold IBM and collect the dividends as my periodicity, is to hold it for a while.  I do not hold IBM out of some sort of ‘idealistic hope’.  If I run EPS through my models even below what is offered of $14.75 and instead use $14.00, and cut growth for the next 3 years to almost flat, it still makes tremendous amount of sense to hold IBM for the next ten years from a value perspective.  Naturally, if we saw those numbers the market would overshoot such guidance cuts.  But I’m speaking of it’s valuations on EPS.  The strategic imperatives seems to be growing.  As they move into these newer businesses, one also has to think as well of their competitors of Amazon (AMZN), Apple (AAPL), and even to some extent, Microsoft (MSFT).

At the present time, IBM is a valuation versus periodicity story.  How long are you willing to wait for the valuation (and the risks of doing so), for the length of time that the transition is taking with all of the headwinds?  Especially when one considers the headstart of it’s analytics competitors?  I will ‘buy’ in the sense that I will continue to hold my IBM.

But at the present time?  I would not purchase more IBM at all.  I will focus my efforts elsewhere.  I will hold IBM, but in my own mind … I now place it completely and totally on the back-burner.  I will have cash on hand for the day that all of this transition has taken hold (will that take another year?  Two years?).  At such a time, I could buy IBM at much lower prices.

Which I think are on the way.  In fact, some long-dated puts may be a good idea (appropriately weighted for larger accounts of course).

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