The good news is, International Business Machines Corp (IBM) topped its earnings estimates for the recently completed fourth quarter.
The bad news is, revenue fell — again — and the 2016 (fiscal 2015) outlook was lackluster. Choosing to see the glass as half-empty, the market responded by sending IBM stock sharply lower on Wednesday morning following Tuesday’s report.
Were it the first instance of waning sales and earnings, the pessimistic outlook might be dismissed as a mere low-balling effort. IBM has left a trail of sinking income and sales, though, extending as far back as 2014 on the earnings front, and as far back as 2012 when talking about revenue.
Yet another lousy year legitimately raises the question of whether this dinosaur can ever be revived.
IBM Earnings
Last quarter, IBM earned $4.84 per share on $22.1 billion in sales. The bottom line was better than the profit of $4.81 per share of IBM stock analysts expected, and the top line was in line with most outlooks.
IBM earnings were considerably lower than the year-ago figure, when the company reported a profit of $5.81 per share. Year-over-year sales were down to the tune of 12%, though the top line only fell 2% when factoring in recent divestures and the impact of the strong U.S. dollar.
There were some bright spots, however. Namely, the company’s cloud-computing segment’s revenue for the full year reached $10.2 billion, up 57% from the prior year’s total.
That’s one of the areas CEO Ginni Rometty wants to develop as a revenue and earnings driver … a so-called “strategic imperative” that’s been supported by a swath of acquisitions. In fact, revenue for all of its strategic imperative lines — security, analytics, cloud and mobile — was collectively up 10% for the full year, and now make up more than a fourth of the organization’s total revenue.
Conversely (and unsurprisingly), though, its older legacy businesses continue to weigh IBM down. Software sales fell 11%, while hardware revenue was lower by 1% for the recently completed fiscal year.
Still, IBM seems to be getting some traction with its new focal points.
Looking Ahead for IBM
Though the pace of shrinking sales and earnings seems to be slowing, for most owners of IBM stock, it’s too little, too late. IBM may only be showing a glimmer of hope because it has acquired so many existing cloud and security businesses.
And that may be the most alarming aspect of all; even with a fast-growing cloud business, IBM still doesn’t expect the current year to be a particularly fruitful one.
For calendar 2016/fiscal 2015, International Business Machines expects to post a profit of only $13.50 per share, well short of the $15 per share of IBM stock analysts had been modeling.
For perspective, the company earned $16.53 per share in 2015 (FY2014), raising concerns that IBM can’t spend money on acquisitions fast enough to offset the ground it’s losing with its older divisions.
Analysts are voicing such doubts too. BMO Capital Markets analyst Keith Bachman, for instance, noted after Tuesday’s quarterly report:
“We are reducing our target price from $155 to $135. Our target price is based on about 9x-10x our 2017 EPS and 12x-13x EV/2017 FCF. Our previous target price had been based on about 10x our 2016 EPS estimate and 13x EV/2016 FCF. While the shares seem inexpensive on a P/E basis, we believe the shares are less attractive on a FCF basis. In addition, we don’t see a meaningful catalyst for the shares. We retain our Market Perform rating.”
Bottom Line for IBM Stock
The $64,000 question is, was the income outlook for 2016 a realistic figure, or is the company simply trying to set itself up to become the heroic beater of estimates?
Most likely, the projected profit of $13.50 per share was the company’s best, most realistic guess as to what shareholders can expect.
Rometty knows by now that this — right here, right now — is the time for plausible hope. She probably wanted to offer some. But, knowing the one thing worse than a disappointing outlook for the year is four straight disappointing quarterly earnings reports, odds are good the company just told investors what was most likely in the cards.
Unfortunately, what’s in the cards almost makes IBM stock un-ownable despite the stunningly low forward-looking price-to-earnings ratio of 7.7. Bachman was right in that regard … the P/E value at this point doesn’t mean quite as much as a lethargic free cash flow outlook.
And of course, with the current year projected to be tepid at best, chatter has surfaced suggesting Ginni Rometty’s four-year run as chief executive could soon be coming to a close. Such a looming disruption makes owning IBM stock an even bigger question mark.
None of this is to say IBM can’t be salvaged. It is to say, however, either the company needs to continue to shrink its way to what it’s going to become, or something drastic needs to change at the top.
Either way, IBM stock is nowhere near as compelling to own as plenty of other tech names are at this time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
