Why Did IBM Miss the 2013 Dow Rally?

Before you go, we thought you'd like these...
Before you go close icon

A rising tide lifts all boats -- except those that are full of holes. The Dow Jones Industrial Average has soared more than 13% higher in 2013, government shutdowns and all. Meanwhile, IBM missed the rally altogether and lost 5% of its value instead (or 3% with dividends included). What's going on with Big Blue?

^DJI Chart

^DJI data by YCharts.


IBM hasn't been its usual dependable self lately. The company reported lower sales year over year in each of the last five quarters, lower operating cash flows in the last four, and sinking GAAP earnings in three of the last four reports. Big Blue even missed Wall Street's earnings targets in the April report, which is as rare as a Turkish movie with a happy ending.

So IBM has disappointed investors in 2013, but the numbers rarely tell the whole story.

That first-quarter miss rested on weak software and services orders from the sequestering U.S. government and a Chinese government in flux. Above all else, IBM's management saw the Chinese changes coming at the federal level but forgot to scale back its targets on the regional and provincial scale.

Moreover, IBM is under new management this year. Longtime CEO Sam Palmisano stepped down and handed the reins to Ginni Rometty in January 2012. As you might expect, the new CEO started shifting the company's priorities.

IBM was shooting for a top-to-bottom balance between software, hardware, and support services under Palmisano's steady hand. This model applied to all of IBM's many target markets, and Palmisano successfully pursued many of them.

In Rometty's reign, the company is shifting its focus to the big data macro trend. The company is slowly abandoning many former target markets where competition is rampant and margins are shrinking. This shift explains some of IBM's weak revenue trends, but it should be a temporary weakness that eventually fuels a dramatic return to strong growth. We just have to wait for Rometty's long-term strategy to mature and pay off.

Of course, that's easier said than done when investors are faced with bottom-line trends like these:

IBM Net Income TTM Chart

IBM Net Income TTM data by YCharts.

This is where the advice on the cover of The Hitchhiker's Guide to the Galaxy comes in handy: "Don't Panic." Feel free to sell or stay away from IBM if you're not buying Ginni Rometty's big data strategy, but don't let the slumping share price scare you away otherwise.

The upside to low prices is that patient investors get a tremendous discount. IBM shares are trading at a historically low price-to-earnings ratio of just 10.1. Buy when there's blood in the streets, if you believe in the long-term thesis.

IBM Chart

IBM data by YCharts.

Why IBM Wants to Play in the Big Data Sandbox
Big data really is a Big Deal. The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.

The article Why Did IBM Miss the 2013 Dow Rally? originally appeared on Fool.com.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.Motley Fool newsletter services have recommended creating a synthetic long position in IBM. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

Man Suspects His Wife Is Cheating On Him - Then His Daughter Reveals What's Really Going Man Suspects His Wife Is Cheating On Him - Then His Daughter Reveals What's Really Going
Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts
Rescuer Sees Bumps All Over This Dog's Skin - Then X-Rays Reveal The Tragic Story Rescuer Sees Bumps All Over This Dog's Skin - Then X-Rays Reveal The Tragic Story