Monday, 17 October 2011

IBM Releases Results - Tech Companies in the US looking good?

With results out from IBM, I thought I'd have a look at the state of the big US technology companies:

From Zero Hedge:

Putting the cherry on top of an ugly day for bulls comes global tech vanguard IBM, which did not use the DVA wildcard and still saw its earnings beat already reduced expectations of $3.22, printing at $3.28... but... it did miss the consensus top line of $26.34 billion by just under $200 milllion, at $26.16 billion. Since this the first time in probably forever that Big Blue has not beat the top line, the stock is certainly not too happy after hours. That this is happening despite the company's boost to its EPS forecast is quite troubling.
Earnings summary:
  • Q3 Revenue USD 26.16bln vs. Exp. USD 26.34bln
  • Q3 Operating margin 46.8% vs. Exp. 46.24%
  • Q3 Services backlog of USD 137bln, up USD 2.4bln
  • Q3 Software revenue USD 5.8bln, up 13%
  • Q3 Americas revenue USD 10.9bln
  • Sees year adjusted EPS at least USD 13.35, saw USD 13.25 vs. exp. USD 13.33
Also notable is that total ST and LT debt increased by $1.5 billion from $28.5 billion at December 31, to $30 billion at the end of Q3: at least someone is benefitting from relevarging at all time low yields.
From the release:
"In the third quarter, we drove revenue growth, margin expansion and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. “Growth markets delivered outstanding revenue performance across software, hardware, and services and contributed to the company's expanded margins. We also achieved strong results in Smarter Planet, business analytics and cloud.
"Based on this performance, we are raising our 2011 full-year operating earnings per share expectations to at least $13.35."
Full-Year 2011 Expectations
IBM raised its expectations for full-year 2011 GAAP diluted earnings per share to at least $12.95 from at least $12.87; and operating (non-GAAP) diluted earnings per share to at least $13.35 from at least $13.25. The 2011 operating (non-GAAP) earnings exclude $0.40 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.

IBM Value Analysis

IBM actually looks pretty good at the moment. Return on equity is forecast to decline, so this will be the area to watch. If IBM cann't stabalise ROE then they could suffer ongoing decline in the underlying value of the business.

Even so, it is very profitable right now and this has been reflected in the share price in recent years. Issues to watch out for is the debt level - however this is offset by very strong cash liquidity


Comparing to Google:

Google also looks good, which has the benefit of having very little debt on the books - unlike IBM. However, the market also tends to pay a premium for Google, which means that it is currently a bit pricey. Value seems to be stabalising around the $500 per share mark.

And Apple:

Whilst the loss of Steve Jobs is unlikely to have any dramatic implications for Apple in the near term, it is also a wonder how they can continue to increase their profitability as they have done in recent years.

What is most likely is that profitability, as measured by Return on Equity, should decline over the next few years. If profits are able to stabalise at current levels, the current share price at and around $400 is reasonable.

Meanwhile at Microsoft:

Even though we could see futher deterioration in the profitability at Microsoft, it may be just looking like the pick of the bunch now. It has a large margin of safety at current prices and, unlike apple, does not require the expectation of profitability growth to sustain or increase the current share price.

The quality of Microsoft is high with good cash flow and capital management.

Whilst some areas of the US market may be weak at the moment, the technology sector looks strong right now. With good profitability, cash flows and cash levels, this is an area that I think could significantly outperform the broader US market over the next year or two.

1 comment:

  1. IBM is no longer the tops in technology thats long gone to apple google microsoft.