IBM Earnings: Is More Pain Ahead for Big Blue?
Venerable tech giant IBM made famous the phrase that an elephant can indeed dance. However, this IT pachyderm has more often stumbled than danced in the past several quarters.
IBM stock has largely had an uninspired year in 2014 as the company continues to
grope for fresh sources of sales growth. Accordingly, the market has awarded IBM with an effectively flat return this year.
IBM is scheduled to report third-quarter earnings after market close on Monday. Let's review what investors should expect from this critical update.
Inside IBM's earnings report
From the look of it, the investing and analyst community largely expects more of the same from IBM. Here are the average analyst expectations for IBM's revenue and earnings per share:
Revenue (In Billion $U.S.)
Again, no huge surprises here. Assuming IBM closely tracks the analysts' expectations, which certainly isn't a given, it will mark the 10th straight quarter of year-over-year sales declines for IBM, a statistic that more acutely frames the company's protracted growth problems.
Looking to the bottom line, the reasonably strong growth amid IBM's top-line problems also shouldn't surprise anyone in the peanut gallery. In addition to continually shedding unattractive businesses that can drag on its profit margin, a la the sale of the server business to Lenovo earlier this year, IBM is perhaps the most prodigious purchaser of its own stock in the entire technology space. Expect much of the profit increase to be fueled by this oft-used tactic.
Perhaps the single main focus of IBM's earnings release should involve growth initiatives. The company has made some significant investments that should help support future growth, including the rollout of its cloud-based Watson service and the development of a network of 40 server centers in 15 countries that it hopes will push its cloud-based software to enterprise users. However, as earnings continue to slowly dwindle, expect investors' patience to hold for only so long.
Short-term pain, long-term gain?
It's hard to deny that IBM's present revenue growth issues make it a reasonably unappealing stock in many investors' eyes. The market certainly thinks so, having priced IBM at under 12 times price to earnings. However, I maintain the market's current, and somewhat deservedly, low opinion of IBM's investment prospects creates an opportunity for long-term, conservative investors. The reasons are twofold.
For starters, although IBM has done little to expand its top line in recent years, its massive stock buybacks over the past two decades helped the company to growing profits impressively even as revenue stagnates. Consider that from the end of fiscal 2002 through its most recently reported quarter IBM reduced its share count by a whopping 61%, and hopefully it's clear that Big Blue's profit growth story is very much separate from its sales growth struggles. IBM has also proven extremely committed to growing its cash payouts to shareholders over the years. In the past decade, IBM has increased its dividend from $0.18 to $1.10, good for a 20% average annual growth rate. This commitment to returning capital to its shareholders has been perhaps the defining trait that has helped this established blue-chip company outperform the market over the past 10 years, even as it struggled to boost sales.
The second reason to believe in IBM's ongoing success is a matter of record. Former CEO Sam Palmisano said IBM would reach $20 of operating earnings per share for fiscal 2015. The very public nature of this pledge suggests investors should take it as gospel creed that IBM will indeed hit this number.
One investors' trash ...
In all likelihood, IBM's upcoming quarterly report will look very much like those from past several quarters. IBM is simply too large to dramatically alter its operational structure and overhaul its product portfolio in short order.
However, with a management team dedicated to methodically leading the company into the cloud-centric future and a maniacal commitment to returning capital to shareholders, IBM certainly exhibits many of the characteristics of a largely unpopular stock that is headed toward better days. IBM's restructuring won't be simple or materialize overnight, but it's highly likely that it will eventually arrive. When that happens, investors willing to consider IBM today will certainly be happy they saw the forest for the trees with one of enterprise tech's most powerful names.
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The article IBM Earnings: Is More Pain Ahead for Big Blue? originally appeared on Fool.com.Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. 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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