What Must IBM Do In 2014?
IBM has fallen behind its long-term road map set in 2010. This year was not kind to IBM, and now the computing giant risks missing its ambitious goals for 2015.
What can IBM do to get back on track in 2014?
First, here's a reminder of IBM's most important goals for fiscal 2015:
Software operations to provide half of IBM's total segment profit.
Growth markets should account for 30% of geographic revenue.
IBM should return $70 billion to shareholders in the form of dividends and share buybacks over the five-year road map period, meaning fiscal years 2011 through 2015.
Operating earnings should hit $20 per share in 2015.
Current run rates show 45% of IBM's segment profit coming from software sales. That's up from 43.6% a year ago, but IBM needs to accelerate its software-focused strategy shift in order to meet this goal.
Why do software sales look attractive to CEO Ginni Rometty and her top brass? Because the division delivers a 38% operating margin, second only to the far smaller financing segment. Services sit at just 16% and hardware offers a measly 6.6% profit margin. Simply put, more software means more profit for IBM.
Growth markets pushed 24% of IBM's revenue last year, but the road map hit a speed bump in 2013. Third-quarter sales in this purported growth driver fell 9% year over year while total revenue declined just 4%. Thus, the growth market sales contribution dropped back to roughly 23%. IBM needs to improve execution in large growth markets, specifically in China, if the company still hopes to meet its 2015 target here.
So it's not all wine and roses, but IBM's shareholder return goals still look solid. With 11 of the road map period's 20 quarters in the books, IBM has paid out $10.3 billion in dividends and bought back $35.1 billion's worth of its own shares. The company is on pace to return $82.5 billion to shareholders before the end of the target period. IBM also issues a fair amount of new shares every year as part of stock-based compensation programs and is on track to hit $73.8 billion of direct shareholder returns even if you back this portion out.
The adjusted earnings target stands at $16.29 per share, and CFO Mark Loughridge sees no reason to back off of the $20 goal for 2015.
So IBM's strategy for 2014 is pretty simple:
Work through economic reform headwinds in China to reignite the stalled growth markets engine.
Put even more resources into the software division, particularly in cloud computing products that have become a near-myopic focus under Rometty.
Keep shoveling cash into shareholders' pockets, mostly by retiring a metric ton of IBM shares.
IBM shares currently trade at prices not seen since 2011, more than 18% below the all-time highs that were set in March and a spine-tingling 30% behind IBM's peers on the Dow Jones index, year to date.
Poor execution in China didn't help, but the company is generally doing what it promised to do back in 2010. If it can execute its game plan in 2014 then there's no reason why one of the Dow's worst performers in 2013 wouldn't become one of the strongest next year. This just might be a brilliant buy-in opportunity, and I'm happy to stick with my long-term thumbs-up CAPScall on IBM.
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The article What Must IBM Do In 2014? originally appeared on Fool.com.
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