International Business Machines (NYSE:IBM), long considered by investors to be a calm port in the often-stormy seas of technology, has fallen into a fiscal abyss from which there is no easy exit.
The Armonk., N.Y.-based company posted $1 billion less than what Wall Street expected in sales for the most recent quarter, marking the sixth straight quarter where sales failed to meet expectations. While net income beat expectations thanks to a one-time tax benefit, veteran tech analyst Toni Sacconaghi, noted that IBM would have missed earnings expectations otherwise.
“So my simple question is what’s changed in the last six or seven quarters?," Sacconaghi asked during the earnings conference call. "Has there been less of a focus on execution that had to do with the change in leadership at the top? I think it’s very easy to explain away a given quarter, but six, seven, eight quarters in a row begins to make a trend.”
IBM had no easy answer. Chief Financial Officer Mark Loughridge noted that IBM”s business in China, like many other American multinationals, is struggling. Sales in China slumped 20%. The decline is especially hard on IBM’s hardware division, which gets about 40% of its business from the world’s most populous country.
There were other red flags in the earnings that alarmed investors. IBM’s Services business, which has long been an area of growth, is struggling. Revenue in Global Technology Services, which advises companies on IT purchases among other things, plunged 4.6% to $9.54 billion. Global Business Services, which includes management consulting, dropped 1.3% to $4.6 billion. Systems and Technology, IBM’s hardware operations, fell 11.8% to $3.76 billion. IBM’s Software division was a bright spot though not much of one. Its sales rose 4.1% to $6.42 billion while pre-tax income fell 2% to $2.44 billion.
The macroeconomic environment isn’t favorable to IBM either.
Though corporate technology budgets are on the rise, they haven’t yet returned to their pre-recession levels, according to a survey released last year by the Society for Information Management. When corporate profits remain under pressure, chief information officers are going to be less apt to spend. That means one thing for IBM and other technology companies - discounts.
Customers are in no mood to pay list prices. They will even demand better deals to be a reference customers for vendors who always need CIOs to vouch for them to other CIOs or the media. Smart corporate technology executives can easily pit vendors against one another in the hopes of getting the best price. Who could blame them?
IBM, though, has come back from worse. Former CEO Louis Gerstner retooled the company during the 1990s by overhauling Big Blue’s insular corporate culture and placing an emphasis on the customer. Whether current CEO Ginni Rometty can turnaround IBM remains to be seen. Shares of the company fell 6% to close Thursday at $174.83.
The Bottom Line
Better times lie ahead for IBM. It’s just a question of when. The stock is too cheap to ignore. It is trading at a price-to-earnings multiple of about 12, a discount to rivals Oracle (Nasdaq:ORCL) (14.2) and Microsoft (Nasdaq:MSFT) (13.5). Wall Street also hasn’t thrown in the towel on IBM either. The average 52-week price target on IBM is $214.20, about 20% above where it recently traded. The time to buy the stock is now.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.