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Tiziano Frateschi
Tiziano Frateschi
Articles (1378)  | Author's Website |

Despite the Last Negative Quarter, IBM Is Expanding Its Business

A partnership with Infosys sets the company to develop its Cloud business

International Business Machines Corp. (IBM) creates business value for clients and solves business problems through integrated solutions that leverage information technology and knowledge of business processes. The company's operations consist of five business segments namely Global Technology Services and Global Business Services, which the company collectively calls Global Services, and Software, Systems and Technology and Global Financing.

For IBM the third quarter was the 14th straight quarter of declining sales; despite falling sales, the company still plans to invest heavily in Cloud computing, data analytics and other areas where it sees growth and believes the aggressive investments of today would pay off in the future because, with the rise of Cloud computing, corporations are increasingly buying computing resources and software on demand instead of buying their own data center gear.

Like Oracle Corp. (ORCL) and Microsoft Corp. (MSFT), IBM is shifting away from hardware to the Cloud business. Microsoft's Cloud business competes against Amazon's (AMZN) AWS in which web software unit of Amazon has grown AWS into a $5 billion business. In September, IBM acquired Cloud startups StrongLoop and Meteorix to fortify its BlueMix development platform that can make IBM one of the leading, most qualified and experienced Workday (NASDAQ:WDAY) service providers in the world.

The dark side of the last quarter

  • As a stronger U.S. dollar accentuated weakness in demand from China and emerging markets, IBM posted a bigger-than-expected drop in revenue, which fell 13.9% to $19.28 billion and was below analysts' average forecast of $19.62 billion.
  • Its adjusted profit was $3.34 per share compared to the expected $3.30 per share from analysts.
  • Diluted earnings from continuing operations was down 13% year to year. Operating (non-GAAP) diluted earnings from continuing operations had a decrease of 9% compared to the third quarter of 2014.
  • Third-quarter net income from continuing operations, compared to the third quarter of 2014, had a decrease of 14%.
  • Operating (non-GAAP) net income impacted by currency had a decrease of 11% compared to the same quarter of 2014.

The bright side of quarter

According to IBM’s CEO, revenues in its strategic imperatives that include Cloud computing, data analytics, and mobile increased 17% year to year. They call this the bright side of the quarter because, where they have been investing, they have been making tremendous growth.

Even so Microsoft has a wider and deeper range of third-party partners, building tools and services that work with Microsoft Azure, but IBM is gaining ground with Oracle and SAP.

IBM launched Bluemix in 2014, and that matured quickly to become the largest Cloud Foundry deployments in the world, recently IBM announced a partnership with Infosys Ltd. (INFY) in which it will tap IBM's Cloud platform Bluemix to rapidly prototype, develop and deploy the next generation of Cloud apps for its global client base.

Infosys designs and delivers IT-enabled business solutions to its clients. It provides technology, business consulting, outsourcing and engineering services to help clients in over 30 countries. During the last quarter Infosys reported 6% growth in revenue, and net profit had quarter-on-quarter growth of 12.1% and year-on-year growth of 9.8%.

Price and fundamentals

The company has a market cap of $139.05 billion with strong fundamentals, according to the last fiscal year.

Profitability and growth has been rated by GuruFocus as 8/10. Returns are positive and well-above the average performance of the Global Information Technology Services industry. ROE at 108.90% and ROA at 12.47% are outperforming the 86% of its competitors. At current levels the company is having the best performance of its recent history; profitability is strong as well, with operating margin at 18.65% and net margin at 19.96% with ROE at 11.51% and ROA at 5.53%. Profitability is ranked higher than 89% of its competitors with operating margin at 18.65% and net margin at 16.96%.

Even financial strength has been rated by GuruFocus as 8/10, but the current ratios such as cash to debt at 0.24, equity to asset at 0.12 are underperforming the 90% of other companies in IBM’s industry.

GuruFocus rates the business predictability as 4 stars out of 5, and the DCF calculator gives the company a fair value of $297.38, meaning the stock is largely undervalued and is trading with a margin of safety of 52% at the current price of $142.

The company is paying its shareholders a yield of 3.33% with a very comfortable payout ratio of 31%. The company has been increasing its yield since 1995 with a growth rate of 20.10% over the last 10 years and 14.40% in the last five.

The price of the stock has dropped by 12% during the last 12 months and is now trading near its 52-week low, 19.48% below its 52-week high.

During the third quarter, shares of the company were bought by the firm Tweedy Browne (Trades, Portfolio) Global Value and the investors Brian Rogers (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and the investment firm Manning & Napier Advisors Inc. slightly reduced their stakes. Warren Buffett (Trades, Portfolio) is still the company's leading shareholder among the gurus with 8.12% of outstanding shares of the company and the IBM’s stake is the 11.82% of his total assets. In second position the investor Jeremy Grantham (Trades, Portfolio) holds 0.28% of outstanding shares of the company, followed by the firm HOTCHKIS & WILEY with 0.17%.

About the author:

Tiziano Frateschi
You can read about me on this blog: www.theextraincome.info

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