Can IBM Earnings Grow If Sales Stay Flat?
IBM will release its quarterly report on Wednesday, and investors haven't been overly optimistic about the company's prospects lately, bidding shares down earlier this month to their lowest levels in almost two years. Yet even as sluggish revenue weighs on the company, IBM earnings could still grow as long as its extensive share repurchase program keeps driving outstanding share counts downward. Moreover, rebounds in sales at IT consulting rivals Accenture and Infosys could point to relief ahead for IBM as well.
IBM has done an excellent job of navigating the long-term trends in the tech industry, moving beyond its initial emphasis on hardware well before the industry started resembling a more commoditized business. Now, though, higher-margin business lines like consulting and IT services have attracted most of the other major players in the tech world. At the same time, cost-conscious customers have been reluctant to spend on major tech-related capital expenditures. How can IBM get past those challenges to stay on track for its 2015 target to reach $20 in earnings per share? Let's take an early look at what's been happening with IBM over the past quarter and what we're likely to see in its report.
Stats on IBM
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance.
Could IBM earnings surprise investors this quarter?
Analysts have had mixed views on IBM earnings in recent months. They've boosted their third-quarter and full-year 2013 projections slightly, with a boost of about 1.3% for full-year earnings estimates. But they've made minor cuts to their views for 2014. The stock has shared this longer-term pessimism, falling about 3% since mid-July.
IBM brought some positive momentum into the quarter, even though at first glance, its second-quarter report had numbers that looked ugly. Net income dropped 17% from the year-ago quarter, with a 3.3% drop in revenue weighing on the company. Those results were consistent with some of the longer-term trends that Accenture and Infosys had seen in previous quarters. Yet gains in margins pointed to IBM's ability to make more from less, and a boost in full-year guidance reassured investors that any bumps in the road appeared to be temporary.
Still, investors continue to worry about the divergence between earnings and revenue at IBM. Even after accounting for adverse currency fluctuations, IBM's second-quarter sales fell 1%. That's partly to be expected from such a large business. Yet although the company has been able to drive earnings gains through managing expenses and some other onetime items, IBM's inability to produce higher revenue will eventually limit its ability to sustain the pace of its net income growth. Earlier this month, analysts at Barclays downgraded IBM for precisely that reason, especially as competitive offerings from more cloud-focused rivals weigh on its more traditional business.
What IBM really needs to do is to find ways to turn its big-growth initiatives into more immediate profits. Data analytics have driven much of its growth, and IBM has pushed Big Data hard, buying software provider Daeja Image Systems last month and analytics specialist The Now Factory earlier this month. In addition, by committing another $1 billion toward Linux open-source technologies, IBM hopes to boost its Power Systems segment as demand for servers grows in the cloud-computing age. Those other initiatives give it a competitive advantage over Accenture and Infosys, which have to rely more on their consulting services without having the in-house technological expertise to develop certain challenging solutions.
IBM is also making moves to refocus on those core areas, divesting itself of extraneous business lines. Synnex bought IBM's customer-care services unit last month, and while the $505 million that IBM will receive under the deal isn't very significant to the tech giant, the relationship between IBM and Synnex could pay dividends for both companies for years to come. Indeed, bridging the relationship between customers and their products could boost IBM's sales, further distinguishing it from Infosys and Accenture.
In the IBM earnings report, watch to see whether the company expects its revenue slump to continue. If sales growth doesn't materialize in the near future, it could prove difficult for IBM to come up with enough alternative methods to keep raising its earnings per share toward its long-term target.
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The article Can IBM Earnings Grow If Sales Stay Flat? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Accenture and owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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