IBM Has Real Underlying Strength
Even long-term "investors" who don't sell all their positions at the end of the day can't help but get sucked into the short-term price movements in the markets -- especially over the last 8 months, when you've had to from a risk management perspective. However, reaction to IBM's (IBM) initial earnings release last night and the performance of the stock today suggests why cool heads need to prevail.
When the numbers first came out last night, investors seized on the top-line revenue drop of 11% from a year earlier. The stock dropped from $100.43 to $97.30 initially after-hours. Market commentators immediately worried that shares would be under pressure this morning at the open. The did open down at $98.41 but, within 20 minutes, were back above the previous closing price. They're now trading up 1% this afternoon.
With more time, investors digested some important facts about IBM from the release and commentary: the overall revenue drop was only -4% before the dollar conversion, EPS and gross margins were both up from a year earlier period, they signed $12.5B in new services contracts in Q1 which will get recognized over time (building their book of business), and they paid a healthy amount into their pension reserves which will free up EBITDA in future quarters to drop to the bottom line. The CFO reiterated confidence in the rest of year's earnings too.
IBM is one of the best run tech companies these days. The shares are fairly cheap at a 10x forward P/E. It looks like a strong bet for the rest of the year and you get a small (2%) dividend for your troubles to boot.
My beef with the company is their R&D spending: it's $6.3B a year -- almost 3x the amount spent by Google (GOOG). This is still a company that's historically spent gobs of money in their labs (in the old spirit of Xerox PARC and AT&T Labs). Sometimes, it's led to blockbusters in innovation, but mostly it hasn't. It would be nice to see their batting average improve with less money spent.
Originally published in RealMoney.com on 4/21/2009 1:52 PM EDT
