IBM's earnings problem

It goes beyond a slowdown in China.

By Jim J. Jubak Jul 18, 2013 7:52PM

Image: Dollar sign on keyboard (© Corbis)I expect a slowing Chinese economy will take a cut out of earnings this quarter -- and next and next -- at commodity producers, at luxury goods retailers and at fast food operations such as Yum Brands (YUM) -- but IBM (IBM)?


That IBM blamed its weak second quarter on slowing sales to China (and the other BRIC economies of Brazil, Russia, and India) shows how pivotal emerging markets have become to growth at U.S.-based multinationals, and why even a modest slowdown in growth in those economies is a big deal.


After the close of New York markets on Wednesday, IBM reported second quarter earnings of $3.91 per share (excluding a $1 billion charge for "re-balancing" its workforce that Wall Street called a non-recurring item, even though this has become business as usual at IBM.) That was above the $3.78 a share projected by Wall Street. Revenue fell by 3.3% year over year to $24.92 billion, below the $25.3 billion analysts had projected.


A big part of the revenue problem for the quarter was that IBM’s growth markets in the emerging economies didn’t show much growth. Revenue from the BRIC countries was flat year over year (or up 1% in constant currencies.) That certainly didn’t make up for the 3% decline in North American revenue or flat revenue from the company’s Europe/Middle East/Africa sales region.


The quarter illustrates that IBM has an ongoing problem with earnings growth. IBM continues to generate hefty cash flows—$16.95 a share in 2012—but with revenue showing very little growth, much of the company’s earnings growth is coming from cost cutting (that workforce "re-balancing") and share repurchases. Credit Suisse calculates that cost cutting, improvements in product mix that increase margins and share purchases have accounted for 50% of growth in earnings per share in recent quarters.


IBM did raise its forecast for 2013 non-GAAP earnings per share to $16.86 for 2013 from $16.55. But I think investors would be advised to focus on the recent quality of IBM’s earnings and earnings growth, and ask what multiple they want to pay for the company’s growth. The stock currently trades at 13.2 times trailing 12-month earnings. Standard & Poor’s calculates a 12-month target price for these shares of $227. That would be a 14.5% gain from the 2:30 p.m. New York time price on Thursday, of $198.17.


I would note, however, that S&P gets to that price by assuming that the multiple that investors will pay for IBM’s earnings and growth will increase to 13.6 from the current 13.2.


I find that assumption questionable, unless you’re willing to assume the multiple for the entire U.S. market continues to climb over the next twelve months -- on a belief in faster economic and earnings growth.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.

 

MSN Money on Twitter and Facebook

Like us on Facebook: MSN Money and Top Stocks

Follow us on Twitter: @msn_money and @topstocksmsn

Tags: IBMYUM
4Comments
Jul 19, 2013 7:58AM
avatar

Chinese products.  Folks that can afford the best (everywhere, even China) buy the best for outward signs of arrival (just like in the good 'ole US of A).  Mercedes Benz, BMW, Versace, Tiffany, Rolls Royce, etc.

 

Speaking of "their own products as status symbols", name one of these commonly know to you Chinese status brands.

Jul 19, 2013 7:57AM
avatar
I agree - I Love you Jim but China is not a place to Invest - try moving back to good ole USA !
Jul 19, 2013 2:30AM
avatar
Jimmy, just imagine the earnings problems companies will start having once China's full potential is realized. Chinese won't be falling over America Products as a status symbol, they will be falling over their own products as status symbols. Then the story takes a completely different turn.

Jul 18, 2013 10:32PM
avatar

I hope Jubak writes more articles about China.   I love these articles about China.    I love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.   I love these articles about China.  I love these articles abI love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  out China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.      I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.   I love these articles about China.  I love these articles abI love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  out China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these ar    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.   I love these articles about China.  I love these articles abI love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  out China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  ticles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.   I love these articles about China.  I love these articles abI love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  out China.   I love these articles about China.    I love these articles about China.    I love these articles a    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.   I love these articles about China.  I love these articles abI love these articles about China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  out China.   I love these articles about China.    I love these articles about China.    I love these articles about China.   I love these articles about China.   I love these articles about China.  bout China.   I love these articles about China.   I love these articles about China.    

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
275
275 rated 2
482
482 rated 3
656
656 rated 4
643
643 rated 5
650
650 rated 6
638
638 rated 7
485
485 rated 8
281
281 rated 9
127
127 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
HPQHEWLETT PACKARD CO10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.