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IBM Revenue Drop a Warning to Investors: Avoid IBM Stock

Earnings improve, but sales are under pressure

   

Welcome to the Stock of the Day.

IBM 150x150 IBM Revenue Drop a Warning to Investors: Avoid IBM StockShares of International Business Machines  (IBM) was one of the few companies that managed to lose money in 2013. Shares were down 4% for the year and it doesn’t surprise me at all. The company posted another dissappointing earnings report. Let’s take a look at this latest report and see if there’s a turnaround in the works or more of the same coming from IBM.

Company Profile

IBM is a one-stop shop for about any technology solution that a business might need—from hardware, software, services, and ongoing support. The company spends a lot of money on research and development, has one of the most recognizable brands and is still the second largest company in the industry.

Shareholder Value Buzz

IBM has gone to great efforts to increase shareholder value, including an aggressive share buyback program. I consider stock buybacks a plus for investors, and here’s why—it’s a sign that a company considers its shares good bargain, having fewer shares on the market reduces share price fluctuations, stock buybacks increase earnings per share, helping a company beat analyst estimates when they announce quarterly results, and for dividend-paying companies, buying back stock means that there are fewer shares that require a quarterly dividend payment.

In 2013, IBM increased its stock buyback fund by 75% to $11.7 billion. On top of this, the company also hiked up its quarterly dividend. That was the eighteenth year in a row that the company raised its dividend. It’s too early to know if the company will do it again in 2014.

Earnings Dissapointment

While share buyback programs are high on my list of positives for a company, earnings growth ranks higher. For the fourth quarter, revenues fell 5% to $27.7 billion, missing analysts expectation of $28.25 billion, a nearly 2% miss.

Here’s what contributed to the loss: System and technology unit sales were down 26%, global technology services sales were down 3.6%. Now, though the company reported a 5% drop in revenues, it did manage to post higher earnings and beat analyst estimates. IBM earned $6.19 billion, or $5.73 per share compared with $5.83 billion, or $5.13 per share, a year ago. Share buybacks and taxes played a role in this boost.

Competition Breakdown

IBM competes with the likes of Oracle (ORCL) and Microsoft (MSFT). If you plug all three of these companies in my Portfolio Grader tool, you can see that Miscrosoft is clearly the strongest right now in terms of buying pressure and fundamentals. Even so, that’s not saying much; for all three of these companies this year, analysts are calling for slim sales growth and earnings growth in the single digits. MSFT is currently a B-rated Buy and ORCL is a D-rated an outright sell.

Current Ratings

My ranking of IBM shares has not changed much in the last 12 months as the stock never went into buy territory. Right now, IBM is firmly in D-ranked sell, so I can’t recommend adding shares at this point in time. We need to see some improvement from its sales and its track record of earnings surprises, as well as a pickup in institutional buying pressure.

Bottom Line: As of this posting I consider IBM a D-rated Sell.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!


Article printed from InvestorPlace Media, http://investorplace.com/2014/01/ibm-stocks-tp-sell-orcl-msft/.

©2014 InvestorPlace Media, LLC

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