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Dow-30 Earnings: International Business Machines - First Quarter 2013
Shares of Dow-30 component International Business Machines (IBM – Free IBM Stock Report) plunged after the worldwide supplier of mainframe computers, software, and services reported very disappointing results for the opening quarter of 2013. The company earned $2.70 a share in the March quarter after $0.30 of acquisition-related and retirement costs, up 3% from $2.61 in the comparable period of 2012, but short of our estimate of $2.90. Revenues, however, declined 5% (3% on a constant currency basis), with particular weakness in systems (down 14% adjusted for currency and a divestiture) and software (which rose only 1%, down from 4% in 2012). Management indicated that, despite a solid performance in January, the company ended the quarter hundreds of millions of dollars short of its revenue goal for very profitable software and System z mainframe computers. In addition, currency-adjusted revenues in developing nations increased only 1%, a marked slowdown from the 7% growth pace in 2012. Another problem was that elements of IBM's Power systems, Systems x mainframes, and storage system lines continued to perform poorly. Currency headwinds also became more pronounced as the quarter progressed.
True, there were a few positive trends. The services business performed as expected, with pretax profits up 10% and the backlog rising 5% adjusted for currency. Revenues related to growth initiatives, like business analytics and IBM's Smarter Planet initiative, also rose strongly. Too, margins in the services and software businesses expanded. Earnings per share also benefited from a lower tax rate and stock repurchases.
Looking ahead, management expects many of the software and System z deals that failed to close in the March quarter to roll over into the June term. It also plans to improve its sales execution in the software and systems businesses and intends to take strong measures to turn its ailing systems business around, with related (and as yet undisclosed) charges against June-period earnings. The company also intends to take the bulk of the 2013 workforce reduction charges in the June quarter rather than distributing them throughout the year, as in 2012, and it estimates these charges at about $1 billion in 2013, up from $800 million in 2012.
On a reported earnings basis (after $1.17 a share of retirement and acquisitions costs), the company still expects to earn $15.53 a share in 2013, before the systems turnaround charges, with significant strength in the second half offsetting weakness in the first half. But reported earnings in the June quarter will be reduced by an estimated $0.70 a share of workforce rebalancing charges and the as-yet-undisclosed charges related to efforts to turn the systems business around. Accordingly, although IBM has tended to beat its earnings forecasts during the past several years, we are tentatively lowering our share-net estimate for the June interim from $3.65 a share, to $2.50, and our full-year 2013 share-net estimate from $15.55, to $14.75. But we are not changing our share-net estimate for 2014 of $16.75 at this time. We also assume the company is still on track to achieve its 2015 operating earnings goal of $20 a share ($18-$19 on a reported basis). However, investors should note that prospects for the June quarter and 2013 as a whole are somewhat hazy.
The stock's appreciation potential to 2016-2018, while still not outstanding, has improved a bit following the post-earnings announcement decline in IBM's share price, and long-term investors willing to endure a likely somewhat bumpy road just ahead may want to consider commitments. In view of the uncertain near-term outlook, however, very conservative investors may want to stay on the sidelines for now.
About The Company:International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. Revenues in 2012 can be broken down as follows: Global Technology Services, 38%; Global Business Services, 18%; Systems and Technology, 17%; Software, 24%; Global Financing, 2%; Other, 1%. Foreign business accounted for 57% of 2012 revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.