You know you’re truly in a bear market when not even a better-than-expected earnings report from none other than tech bellwether IBM can stem the tide.
It’s a testament to IBM’s influence, though the Dow did open higher Friday and even briefly crossed the 9,400level—no doubt in large part to Big Blue’s unexpected release of its earnings report after the close of trading Thursday.
Indeed, technology shares showed strength during the first half of the day before turning negative for good shortly after 2pm. IBM’s shares soared higher at the open of trading only to slump later in the day, caught in the downdraft with the rest of the market. Still, the shares lost just $1.55 or 1.7 percent, significantly outperforming the averages.
I guess there is a silver lining in losses that are smaller than other.
IBM said third-quarter profits rose 22 percent to $2.05 per share, up 20 percent from a year ago and beating the consensus estimate of earnings of $2.02 per share. The company also reiterated that it should achieve 22 percent earnings growth for the full year (earnings of at least $8.75 per share).
That reaffirmation of guidance was seen as a confidence booster for the market because IBM gets about 25 percent of its revenues from the financial services industry which is undergoing consolidation and seeing bankruptcies. Gross margins rose to 43.3 percent from 41.3 percent a year ago.
Sales increased 5 percent to $25.3 billion but that figure fell short of expectations by over $1 billion. Excluding currency fluctuations sales grew just 2 percent as the strengthening dollar meant deals done in other currencies worth less when converted into dollars. The top-line miss wasn’t seen as a major issue as analysts had begun taking down their estimates given the slowing economy, and IBM sprung a surprise by announcing results in advance of what was planned to be Oct. 16.
Short-term, IBM may be in for a rough patch. A Forrester Research report recently said the coming U.S. recession will put a damper on growth in the U.S. market for IT goods and services with "continuing weakness in the first half of 2009." In addition, Forrester believes the stronger dollar will begin to weigh on overseas revenues as the dollar is now back to where it was a year ago.
IBM’s shares have shown that they are not immune to a general downturn in the market. When people want their money out of the volatile market they tend to shoot first and ask questions later, and at $100, $95 or $90 per share, IBM’s shares make an inviting target.
Still, investors with a long-term time horizon will likely be rewarded handsomely as the company believes its broad technology portfolio, international exposure and sources of recurring revenue make it a good bet in times both good and bad.
IBM has been a solid performer in up and down markets. Owning at a discount makes sense to me, but I would wait a bit before deploying new capital.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
