Annex Bulletin 2011-13                              July 20, 2011

A partially OPEN edition

Recent...

Happy Birthday, IBM! (IBM to turn 100 on June 16; what's the secret of its success?)

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INDUSTRY TRENDS

 

Updated 7/21/11, 8:30AM HST, adds Stellar IBM Hardware Performance

Analysis of IBM's and top IT companies latest business and market results

IBM Gives Market a Lift

Apple also tries it a day later, but doesn't quite make it

HAIKU, Maui, July 20, 2011 - When the markets closed on Monday (July 18) in anticipation of IBM's second quarter results, the Dow was down in the dumps as were most major indices.  But after Wall Street saw Big Blue's earnings and revenue figures, it bolted upward like a rocket.  The Dow was up over 200 points, and IBM set a new intra-day all-time high of $185.40 (left chart below).

 

The following day, Apple, which also reported stellar second quarter results, tried for an encore.  It didn't work.  The market was down 16 points even if Apple eked out a 2.7% gain to $386.90 (middle chart) 

As for the largest computer company in the world, well, HP remained down in the dumps, especially relative to IBM (right chart).

Since then, IBM has eased down a bit, closing at $183.65 today.  This puts it right on the money of our 1/11/11 forecast, when we said that IBM shares should be trading at $183.52 (left).  So it looks like IBM has finally caught up with the market and is priced roughly where it should be.

The foregoing has made us wonder what the new target for IBM and Apple might be.  So we reanalyzed the business and stock market performances of the top 15 global IT companies we follow.   And the result is the table on the right.

As of today, July 20, it appears that IBM is now priced slightly higher than the average of its top 8 peers' shares.  Apple, on the other hand, is trading quite a bit more (+19%) on hope and prayer of future earnings than on fact and reason.

As for HP, the largest IT company is languishing as No. 8 out of 8 in our table.  Which goes to show us that one should never confuse quantity with quality.  Perhaps HP's new CEO Leo Apotheker can chew for a while on that note.  IBM's Sam Palmisano did it five years ago.  And today, the IBM shareholders are reaping the benefits of Big Blue's focus on quality vs. quantity.

As a result, IBM has now also leapfrogged over Google in terms of market value.  And its market cap is now just a notch below that of yesterday's industry behemoth - Microsoft (see the chart below).

Overall, the market cap of the top 15 IT companies rose 5% in the first half of 2011 to $1.7 trillion, which makes it a first double-digit annualized increase in a number of years.

As for market cap changes in the first half of the year, Dell ended up a perhaps surprising leader of the pack.  IBM beat Apple for a second spot.  EMC, Accenture and SAP followed.

Cisco, HP and Yahoo share declined in double digits, placing these erstwhile highflyers firmly in the cellar.

In terms of earnings, one reason Dell's market up topped the list of our global IT leaders is that its annualized earnings soared by 177%.  Apple's nearly doubled in the same time frame, which is why that company placed second on the above chart. 

Interestingly, IBM's annualized earnings went up by "only" 10%, yet its market cap jumped 22% since the start of the year, up 47% since a year ago.  Which means that Big Blue has been playing catch up with the market, and has now indeed caught up with it.

Stellar IBM hardware performance

The biggest turnaround factor in IBM's resurgence has been its hardware division - Systems Technology Group (STG), and within it the mainframe (System z).

The above charts illustrate the extent of the turnaround.  Mainframe revenues were up 61% in the second quarter, Power (Unix) business rose 12%, System x surged by 15% while storage grew 10%.  They've all gained share against the competition.

The chart on the right shows the sources of which grown - the emerging markets, most notably China.  The continuing weakness of the U.S. dollar is also adding a non-operational benefit to IBM's increasing focus on international markets.  By 2015, the company expects to derive 30% of its business from emerging markets, up from 21% in 2010. And the IBM hardware is leading the way.  It accounts for 27% of the emerging markets.

Summary and Outlook

As we look ahead, IBM will enjoy the double-whammy benefit from its foresight to invest in developing countries, and from the continuing weakness of the U.S. dollar (caused by our huge debt and trade deficits).  So while business results are likely to improve in line with the company's roadmap to $20 EPS in 2015, the stock price may have now reached the level where treading water is in order. 

If one were to take the Top 8 IT companies EPS averages, the IBM stock price has already exceeded that level ($177).  But if we assumed broader top 15 EPS average, then it would still have room to rise to about $201.  So that's the trading range in which we expect Big Blue shares to be all other things being equal.

Of course, the preceding would assume that the markets behave rationally.  Alas, that's rarely the case.  And since ebb and flow of tides raises and drops most boats on Wall Street, so will the IT shareholders' fortunes rise and fall with them.  Big Blue holders should enjoy the sunshine while it lasts.

"The second quarter was the icing on IBM's centenary birthday cake," we said immediately upon release of the IBM latest results on Monday.  "Big Blue is evidently firing on all cylinders.  The results have exceeded most people's expectations, maybe even IBM's own.  Which probably why IBM also raised its 2011 earnings estimate."
 

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

Happy bargain hunting

Bob Djurdjevic

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Volume XXVI, Annex Bulletin 2011-13
July 20, 2011

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

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