Annex Clients' Confidential
Page
Tables & Charts
Five-year Forecast...
If "a picture is worth a thousand words," then
the table that follows below pretty much says it all about Big Blue.
The table looks five years back, and five years forward to assess at a high
level the performances of the company's three major lines of businesses -
hardware, software and services
Actual/Forecast |
Hardware |
Software |
Services |
Revenues |
Earnings |
C.A.C. 05-10: |
-3.6% |
7.4% |
3.5% |
1.8% |
13.3% |
C.A.C. 10-25: |
4.0% |
4.9% |
3.6% |
4.1% |
4.9% |
As you can see, after shrinking in the last five years, partly due to disposition of
the PC business and some other one-time sales, we expect hardware to
resume growth in the next five years at a rate of 4% per year.
Software and services should grow a little faster - at about 5% and 4%
respectively. And since these two units now represent
more than 80% of IBM's business, the whole company will also grow
over 4% compounded annually.
But the company's net earnings will grow
even faster. And maybe even faster that 5% compounded annually if
IBM decides to spend more money on acquisitions and less on stock
buybacks.
The pattern we are seeing here is that of a
company that's not seeking growth for the sake of growth. It is
that of a company whose goal is quality earnings growth.
It is the growth that only happens when earnings and margins rates of
increase exceed that of the bulk of the business - revenues.
That's what we were trying to get the former
IBM chairman, Lou Gerstner, to understand back in 1996 (see
Break
Up IBM!,
Mar 1996 and
Louis
XIX of Armonk, Aug
1996). We were not successful. But his successor "got
it." Sam Palmisano showed the first spark of it in public during
an analyst meeting in Bangalore, India, in June 2006 (see IBM
vs. HP: A Tale of Two Blues). Here's the chart
that "said it all" back then about the new Big Blue.
Ever since, we have been seeing
confirmations of this strategy, and the financial benefits that accrued
to IBM shareholders from it. Just as important, especially from
Wall Street's point of view, the new strategy has brought
stability back to IBM results. "Steady, as she goes" was
not chosen randomly as the theme of this analysis and forecast.
One had to marvel at how well the Big Blue
ship sailed through the financial hurricane of 2008 practically
unscathed. Big Blue excelled as other, bigger companies keeled
over, some having to be bailed out by various governments just to stay
afloat. The outcome showed that bigness was no longer king in the
IT industry, nor in business in general.
Here's how we finished out last year's
forecast:
"Nimbleness, flexibility, creativity, ability
to change quickly... are prerequisites for survival in storms at high
sea. And those are the qualities that Big Blue exhibited in the
last four years since IBM first hoisted its Quality over Quantity flag.
Maybe one of these days, months or years, the penny will drop and Wall
Street will also notice it. Once they do, the Big Blue will morph
into a Smart Blue, the king of the Smart Planet, and its shares will
zoom past $150 from the current $128-trading range."
Well, Wall Street did take notice. And
IBM is now trading in the mid $160s. But it still has room to go
up. We figure about $180 would be a fair price right now relative
to its major competitors.
And now, here are some detailed numbers that
back up this forecast...
IBM 2011-2012
P&L Forecast (PDF
file)
IBM 2010 Business Segment
Tables (PDF
file)