IBM struggles with 3 straight revenue declines

Shares have sunk to about the average price that Warren Buffett paid for the stock from 2011 through the first quarter of this year.

By GuruFocus.com Oct 21, 2013 1:28PM
A man walks past the IBM logo at the CeBIT technology trade fair on February 28, 2011 in Hanover, Germany (© Sean Gallup/Getty Images)Even a long-term investor hopes for at least some movement in a stock after two years.

But there is little appearing in IBM (IBM), whose shares declined 6% alone last Thursday to a new 52-week low of $172.57 after a disappointing earnings report.

They are also brushing the average purchase price of $172.80 that Warren Buffett has paid over a two-year period, from the first quarter of 2011 through the first quarter of 2013.

The financial report causing the sell-off Thursday showed revenue down 4% quarter over quarter to $23.7 billion, marking the company’s third quarter this year of revenue decline. 

The greatest decline occurred in its systems and technology segment, down 17%, and growth markets, down 9% and trailing major markets for the first time. Major markets improved by almost two points sequentially, making it the best performance for the markets since the first quarter of 2012, even with China down 22%.

All other segments saw at least modest increases, with Smarter Planet revenue up more than 20% year to date, and cloud revenue up more than 70% year to date, exceeding $1 billion for the first time, and helped by a major acquisition of SoftLayer in July. 

Services, its largest segment, saw revenue fall 3% to $9.5 billion. Software, its second largest, saw revenue increase 1%. 

The company also reported a 6% increase in net income to $4 billion, helped by expanded gross and net operating margins, and maintained full-year EPS guidance of $16.90 – excluding a second-quarter workforce rebalancing charge -- that it projected in the first quarter.

When Buffett, chairman and CEO of Berkshire Hathaway (BRK.A)(BRK.B), announced that he bought IBM after avoiding the technology sector for almost his entire career, he listed several reasons. The first was the skill of management. 

Second on the list was its ability to consistently meet its five-year goals, the next of which is set for 2015. 

Buffett in November 2011 told CNBC: “I don't think there's any company that's -- that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job."

Third-quarter results placed it on its way to meet most of its 2015 aims. Despite the revenue declines, IBM said in its third-quarter conference call it is still confident in its ability to reach its goal of at least $20 in operating EPS by 2015. It also returned another $11 billion to shareholders in the first three quarters of the year through dividends and repurchases, on its way to its 2015 goal of $70 billion. Buffett praised the company’s share repurchase policy on CNBC during his holding announcement, saying, “If they get it down to where there's 64 million shares outstanding, I'll be very happy.”

Another goal -- for growth markets to approach 30% of geographic revenue -- hangs in the balance as revenues for the countries declined 9%. Yet the company appears confident it can turn that around.

Analysis shows that IBM has also been issuing new debt of more than $7.7 billion over the past three years, and has a PB ratio of 11.52, close to a 10-year high. Its P/E, on the other hand, has fallen to a three-year low at 13.4.

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