Annex Bulletin 2011-08 April 13, 2011
A partially OPEN edition
HP: Ghost of EDS Haunts HP (Analysis of HP's first quarter 2011 business results)
Case Makes a Case for Innovation (Analysis of new "Startup America" program)
Updated 4/19/11, 9:00APM HST, adds Market Update: TI, Japan
Annual Update to IBM Five-year Business Forecast
Wall Street's New "Rock of Gibraltar"
Company Finally Getting Credit for Its Rock-solid Business Results; IBM Outperformed All Market Indexes in Last Six Months
HAIKU, Maui, Apr 12, 2011 - The market has discovered its new "Rock of Gibraltar" this year. Forget Google or even Apple, the recent stock market highflyers. The new model of strength and stability is a company which is celebrating its 100th birthday in 2011. The Big Blue centenarian is soaring above all such relative IT upstarts, not to mention the industry "oldtimers," such as Microsoft and HP. Both of them are hovering in the cellar of the stock market charts below.
Not only is IBM stock leaving its IT major competitors in the dust, it is also outperforming all major market indexes, including the Dow and S&P of which it is a part. In short, IBM has become a safe harbor, a model of stability, especially at a time of significant market volatility, caused by several Arab revolutions and major Japanese earthquakes.
Business Segment Performance
In 2010, all major IBM lines of business bounced back after a declining year in 2009.
Mainframe revival led the server resurgence with a 69% jump in the fourth quarter, up 16% for the year (left). The System x also excelled with a 27% surge, while the System p revenues declined 8% (middle). As a result, IBM overall hardware did in double digits in 2010 (up 11%), just as we predicted at the start of last year when nearly all hardware lines were pointing south (see Big Blue Poised for Growth Again, Jan 2010 ).
Furthermore, IBM Global Services, the company's largest business segment which delivers about 56% of Big Blue's revenues and about 40% of its pretax profit, also had a growth year in 2010. And we expect that actually to accelerate in 2011.
Last but not least, IBM's most profitable business unit - Software - grew 5% last year and accounted for almost 45% of the company's total pretax profit. Again, we expect that to continue this year (right chart).
So with all major business components growing again despite the turbulent global markets, no wonder Wall Street is starting to pay attention to IBM once again. The spotlight and the credit are long overdue.
Summary & Outlook
One reason we felt that IBM deserved better stock valuations that the market was giving it credit for six months ago was that the company is relentlessly pursuing a clearly mapped-out strategy. Ever since five years ago, Big Blue has been focusing on and enhancing Quality of its business (right), fostering growth through emerging markets, while also opening up new opportunities in developed countries, such as with its cloud technology.
When IBM executives presented their "2015 Roadmap" to investment analysts last May, they spelled out in very specific terms not just what their objectives are, but also how they are planning to get there.
The two left charts were a part of the presentation deck that the IBM CFO, Mark Loughridge, used at this session (see Big Blue Rains Honey on Wall Street, May 2011). The chart on the right compares out five-year forecast (blue bars) with that of IBM.
As you can see from the right chart, we are not quite as optimistic as the Big Blue executive team, but nevertheless think that IBM will continue to grow steadily both its revenues and earnings. We think that by 2015, IBM revenues will be about $122 billion, and its earnings almost $19 billion.
The main reason for our slightly lower forecast is that we don't think that IBM figured in any bumps on the road which we are all likely to hit over the next five-year period. And because about two thirds of the EPS gains come from a fairly nebulous "operating leverage" ($2.80), and non-operational stock buybacks ($2.80), with only about $3 attributable to revenue growth.
So we expect Big Blue to grow its revenues at about 4% compounded annually between 2010 and 2015, while its earnings should rise 5% compounded annually. But IBM could accelerate these growth by cranking up acquisitions. So far, the company has fingered about $20 billion for it between now and 2015, while "reserving" about $50 billion for stock buybacks. If these figures were reversed, or at least brought closer into balance, IBM would have a much better chance of making its 2015 forecast of "at least $20 (operating) EPS."
Either way, the company is poised for a ride up the market cap slope.
HAIKU, Maui, Apr 14, 2011 - They say "a picture's worth a thousand words." Take a look at the latest picture of the Big Blue "Rock of Gibraltar"...
This market snapshot was taken in early afternoon New York time. While the market and major IT stocks were drifting downward, the Big Blue Rock was up. Since then, the IBM stock has moved even higher, dragging along the Dow and the S&P into positive territory as well.
HAIKU, Maui, Apr 19, 2011 - With an hour or so to go before we find out how IBM did in the first quarter of this year, the biggest question on this analyst's mind is the impact of Japan's earthquake. Texas Instruments yesterday became the first major company to quantify the effect of the Japanese disasters on its business. Here's what Kevin March, the TI CFO, told the analysts during the conference.
The reason we find this instructive is that TI and IBM derive about the same amount of business from Japan - roughly 10% of their global revenues (left chart below).
We don't normally follow TI, but found it very interesting to learn that TI actually outperformed IBM and the market in the last six months. And as you saw from our recent analysis, IBM has done better than ALL of its major IT competitors in that time frame (see Wall Street's New "Rock of Gibraltar", Apr 12, and the right chart above). Which means that TI, an "old" company like IBM (TI is 75 years old), has beaten them all - the upstarts and the establishment players.
Which is why it is instructive to see what they had to say yesterday about the future impact of the Japan earthquake. After all, so far, we have seen only about half a month's worth of it. Here's another excerpt from the TI teleconference with analysts (Apr 18):
So stand by for more in about an hour or so after IBM releases its first quarter earnings report.
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HP: New Broom Sweeps Clean (Apotheker fills our first prescription in board shake-up)
IBM: Another Phoenix of the IT Industry , Analysis of IBM's 4Q10 result
One Man's Pain, Another Man's Gain? (Analysis of possible impact of Steve Jobs' health on IBM, Intel, other IT companies)
Consumer Rules (Analysis of top 15 global IT leaders' stock and business performances)
IBM Hardware to Rise and Shine Again (Analysis of IBM STG business results and outlook)
BARRON's: IBM Shareholders Will Like New Year (Analysis of Barron's article on IBM stock)
HP's "Stealth CEO" Sounds Bullish in First Public Appearance (Analysis of HP's fourth quarter business results)
Silicon Valley Rodeo (Editorial on shenanigans and costly trivial pursuits)
IBM Business Up, Stock Down (Analysis of Big Blue's third quarter business results)