The Activists Should Jump All Over IBM Stock

IBM (NYSE:IBM) reported fourth-quarter results on Jan. 21. Better than expected, IBM stock rose by 5% on the news.

5 Artificial Intelligence Stocks to Consider
Source: Twin Design / Shutterstock.com

That would be great news for most companies. However, a 5% gain for a stock that’s trading at the same price it did in October 2010 is hardly a cause for celebration. IBM continues to be a dead stock walking. 

Forget all the niceties about Red Hat saving CEO Ginni Rometty’s bacon. I’ve said it before, and I’ll say it again: IBM needs a new leader. It’s time that activists jump on the aging tech stock. 

Here’s why.

Rometty Won’t Get the Hint

I guess when you’ve been in the top job for eight years, it’s tough to give up the trappings of the role, including average annual compensation over the past three years of $30.5 million, which includes stock vested between 2016 and 2018.

Barron’s recently reported that since Rometty was announced as the new IBM CEO in late 2011, its stock has lost about 20% (paywall) of its value. An investment in almost any ETF at the time would have served you better. 

By every standard, Rometty has not delivered for IBM shareholders, and yet she remains CEO. In the first three quarters of 2019, a total of 1,160 CEOs left their jobs, according to research from Challenger, Gray & Christmas. There were 154 losses from the tech sector alone. 

In the same Barron’s article, Wolfe Research tech analyst Steve Milunovich told the magazine that IBM’s two previous CEO’s — Sam Palmisano and Lou Gerstner — stepped down from the top job at 60; Rometty is 62 and eight years into a stint that hasn’t gone well. 

I don’t know her from Adam, so I’m sure she’s a wonderful person, but what I do know from writing about businesses is that sometimes a change at the top can do a world of good for the entire workforce. Just Look at General Electric (NYSE:GE). 

Although GE still has a long way to go before it’s fully recovered from its decade-long decline into mediocrity, CEO Larry Culp has put a little more oomph in its step since his hiring in October 2018. That’s a significant part of what a CEO does — rally the troops.

Activist investor Nelson Peltz got involved in GE’s business in 2017. In September 2019, Peltz commented that Culp is doing an excellent job at the company. A change can make a world of difference. 

So, where are the activist investors to drive change at IBM? The situation seems ideal for someone like Elliott Management, who’ve made a name for themselves for shaking up tech companies. 

What Could Be Done By Activists to Help IBM Stock?

For starters, an activist could push for the ouster of Rometty, replacing her with someone that would put Big Blue back on the road to growth. In fiscal 2019, IBM revenue fell by 0.2%, excluding divested businesses and currency. 

Sure, its cloud revenue jumped 14% in 2019, but the cloud only accounts for 27% of its $77.1 billion in overall sales. By comparison, its services business dropped by 5.8% in the latest fiscal year, and it accounts for 36% of total sales. 

The sale of assets brings me to a second possible solution. Milunovich points out that under Rometty’s tenure, IBM has sold off businesses with more than $10 billion in revenue. When she took over, it had $107 billion in sales, so she’s unloaded 10% of that revenue. 

Does that seem like cleaning house? It doesn’t seem like it to me. 

The analyst believes the services unit is most likely to be sold off. To do so would cut its overall sales by a third, but it would force the company to focus on cloud computing and cognitive software.

Other possible tools in the activist toolbox include finding operational efficiencies, upping margins, returning more cash to shareholders (not easy after Red Hat), cutting headcount, helping it focus on its strengths; the list goes on. 

So far, however, it doesn’t seem like activists have the appetite for fixing what ails Big Blue. That’s bad news for long-time shareholders.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/the-activists-should-jump-all-over-ibm-stock/.

©2021 InvestorPlace Media, LLC