5 Key Takeaways From IBM's Troubles

By StreetAuthority | October 18, 2013 AAA

Here's a not-so-bold prediction: IBM (NYSE: IBM) is likely to be the next company in the Dow Jones Industrial Average to replace its CEO.

Since its board of directors appointed Virginia Rometty to lead the company on Oct. 26, 2011, IBM has steadily morphed from a technology leader to a cash cow. Innovation has been replaced by financial engineering, and the company's just-completed third-quarter conference call was an exercise in deep frustration as analysts fumed that Big Blue keeps delivering another set of missteps.

It's not Rometty's fault. She inherited a bloated behemoth. But it's hard to find any solid moves that might pave the way for a turnaround either.

In the eyes of investors, Rometty got off to a good start. She immediately tasked her charges with finding every opportunity to squeeze out profits, which pushed shares above $200 in early 2012 for the first time in company history. That time held another, more dubious distinction: IBM posted a revenue decline in the first quarter of 2012 and has yet to show revenue growth since.

At this point, analysts have moved their ratings to "neutral" or "hold," with price targets right around the current stock price. They are just being diplomatic -- because in the absence of any deep fundamental change, IBM's slide into irrelevance will only accelerate. 

This isn't a company that can be fixed by a modest acquisition or a new piece of hardware. Instead, a breakup of the company into smaller, more focused segments might be the only answer. It's just a matter of time before IBM's board realizes that.

For investors, the IBM debacle holds several lessons: 

Over the past year, IBM has been talking to investors about a goal of generating $20 in earnings per share (EPS) each year, perhaps by 2015. Shares trading for less than 10 times that goal have simply led investors into a value trap. In today's market, tech investors are focused on corporate strategy, industry positioning and, most of all, revenue growth. Though IBM has been making tentative forays into cloud computing, virtualization, Big Data analytics and other hot tech niches, few would consider the company to be a trend-setter in any niche.

 




Action to Take --> Though IBM has an increasingly bleak future -- unless it embarks upon a radical change -- it remains as one of the most profitable companies (on an absolute basis) on the planet. That leads investors to the question: "At what price would shares be attractive?" My view: never. IBM's massive status means the company (and its stock) will never crash, but it's just too hard to see any catalysts that would push this stock higher.
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