Annex Bulletin 2011-08                            April 13, 2011

A partially OPEN edition

Recent...

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)

IBM CORPORATE

 

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. 

No surprise there (see IBM: Another Phoenix of the IT Industry and IBM Hardware to Rise and Shine Again). 

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.

Click here for detailed IBM forecast tables and charts (Annex clients only)

Happy bargain hunting

Bob Djurdjevic

Market Update

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.

Market Update: TI, Japan Impact

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.

Prior to the earthquake, we were planning for low double-digit second-quarter revenue growth. Because of the earthquake, we have reduced this near-term outlook to about half our normal seasonal growth, mostly due to a combination of lower output at our Japan factories, lower local Japan demand as well as potential supply chain disruptions. The foregone profit on this revenue would be about a nickel of EPS in the quarter. Additionally, the EPS estimate we have provided includes about 5 cents of negative impact for earthquake-related costs. So, in total, the second quarter EPS impact from the earthquake is about a dime.

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):

The revenue impact from the events in Japan will be greater in the second quarter than in the first quarter, considering that we will be operating with only partial output at our factories there, that our Japanese customers are still in the early stages of restarting their own factories, and that we and our customers may face potential supply chain disruptions. Were working closely with our suppliers to get what we need but its too early for us, or anyone else, to say these issues are resolved.

So stand by for more in about an hour or so after IBM releases its first quarter earnings report.

Or just click on SEARCH and use "company or topic name" keywords.

Volume XXVI, Annex Bulletin 2011-08
April 13, 2011

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

(c) Copyright 2011 by Annex Research, Inc. All rights reserved.
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