<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of IBM's five-year forecast (Apr 7)

Annex Bulletin 2010-05                            April 8, 2010

A partially OPEN edition


Big Blue Poised for Growth Again - "State of the Union"-type analysis of IBM performance


Rally of Hope over Fact Continues - Analysis of Top IT Cos 2009 performances



Updated 4/08/10, 11:30AM HST

Update to IBM Five-year Forecast: IBM's Earnings Quality to Improve

Steady, As She Goes

Big Blue's "Quality-over-Quantity"-Strategy Has Paid Dividends in the Past, And Will Do So Again in Future Profits and Margins

HAIKU, Maui. Apr 8 "Steady, as she goes."  That's what the Big Blue shareholders got from their company's business performance in the last two years since we updated our long-term outlook for IBM (see right chart and Annex Research annual update fo 5-yr forecast for IBM, June 20, 2008).  "Steady, as she goes," is what they can expect in the next two years, maybe even longer, according to our latest five-year forecast update.

Yes, the Big Blue stock has been all over the map in the meantime.  And probably will be again in the future.  As we've said many times in the past, sometimes we have to look at Wall Street charts upside-down to see which end is up in the IT industry.

IBM finished 2008, for example, in grand style only to see its stock dragged through the mud by disastrous economic performances of the banking sector, including Wall Street (see Two Thumbs Up for Big Blue, Jan 2009). 

Big Blue did an encore a year later (see IBM Delivers..., Jan 2010).  Yet again its shares lagged behind its often times less successful competitors.  During the last 12 months, Big Blue participated in the stock market recovery mostly by looking up at the shares of its major rivals as well as the Dow, of which IBM is a part (left chart).

But Wall Street does tend to eventually get it right.  Take a look at our July 2007 chart (right) that commented about it as we predicted that the market "bubble" would soon burst, forcing Wall Street to reexamine the way it looks at the business world around it. We are now at a stage when investors need to take another fresh look and undergo a new reality check,

Meanwhile, while we are "Waiting for Godot," this raconteur offers to the loyal and true True Blue shareholders the Raconteurs' song "Steady, as she goes."  We have modified the lyrics to fit the IBM situation (click on the above left image to read the lyrics, then again on the YouTube picture within that PDF file if you want to see the Raconteurs' music video). 

Business Segment Performance

In 2009, all major IBM lines of business declined at varying rates.  But most of them showed improved profitability.  Which is why Big Blue's earnings per share were virtually flat last year, even though the revenues dropped 7%.  Another example of quality over quantity.

As we look ahead, you can expect all three major IBM lines of business to grow in low single digits.

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

Summary & 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.  It 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 (details are available only to Annex clients - click here to access those tables and charts).

Actual/Forecast Hardware Software Services Revenues Earnings
C.A.C. 04-09: XX XX XX XX XX
C.A.C. 09-14: XX XX XX XX XX

The actual numbers are available in that special client-only section of our report.

As you can see, after shrinking XX compounded annually 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 XX per year.  Software and services should grow a little faster - at about XX annually.  And since these two business activities now represent more than 80% of IBM's business, the whole company will also grow at about XX compounded annually.

But that's not the real story.  The real Big Blue story is told in that last column on the right.  The company's net earnings will grow at more than double the rate of the revenue growth - at XX annually.  And that's up from a XX per year growth in the past five years.

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. 

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.

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

Happy bargain hunting!

Bob Djurdjevic

Click here for PDF (print) version

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Volume XXVI, Annex Bulletin 2010-05
April 8, 2010

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

(c) Copyright 2010 by Annex Research, Inc. All rights reserved.
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