BNN Interview: IBM Gaining Traction But Still Early In Transition

Today I joined BNN to discuss IBM Earnings

IBM earnings

With CEO Rometty’s surprise October 2014 announcement suspending earnings guidance investors have been understandably cautious with regard to maintaining positions in IBM shares. The 1Q15 results showcased the fundamental difficulties IBM confronts as revenues fell -12% y/y to $19.6bn while EPS rose +9% y/y to $2.91. Revenue growth is necessary for investor support and IBM shows marked weakness on this front with sales declines reported in all segments. Granted the strong U.S.$ and divestitures (e.g. System X server business to Lenovo) served to depress results, but there are at present few signs of recovery. Still, we are encouraged by the positive early results from the mainframe refresh cycle (constant currency revenues from System Z mainframes +130% y/y) and progress in strategic imperative areas (Cloud revenues +60% y/y, Business Analytics +12% y/y). IBM remains a company in the early, risky stages of transitioning itself to a cloud-based computing era where name-brand hardware and services assets have declining value.

Thoughts on IBM’s turnaround and the stock

If IBM gets the transition right, the P/E multiple should expand from its current 10x to 12x as investors discount expected higher long-term growth. This should get IBM share price back towards $200 from the present $165. However, investors should note that the pace of change in the tech sector is fast and companies behind the curve struggle to catch up.

Outlook for Yahoo earnings after the bell tomorrow

YHOO 1Q15 revenues forecast at $1.06bn (-3% y/y) with EPS $0.18 (-53% y/y), a performance that should raise questions for investors on what value YHOO shares should have when BABA stake is spun-off. The YHOO core of search and display advertising revenue is in secular decline and the company will have to show solid traction in growing mobile, video, native & social (MVNS) activities to demonstrate that YHOO as a stand-alone company is keeping pace.

Expectations for earnings from Facebook, Microsoft, Google, Amazon and eBay later this week

FB: Revenues $3.56bn (+42% y/y), EPS $0.40 (+18% y/y) – showing good mobile growth, well-positioned.
MSFT: Revenues $21.1bn (+3% y/y), EPS $0.51 (-25% y/y) – in transition to establishing mobile relevance.
GOOG: Revenues $17.5bn (+14% y/y), EPS $6.60 (+5% y/y) – steady grower, but needs to accelerate EPS by limiting costs.
AMZN: Revenues $22.4bn (+14% y/y), EPS -$0.12 (-152% y/y) – always a bet on 4Q seasonality, 1Q seasonally weak period.
EBAY: Revenues $4.4bn (+4% y/y), EPS $0.70 (+0% y/y) – the play here is the PayPal split-off.

Are valuations getting rich?

The sector has had a good run (+17% over past year vs. +12% for S&P500), but US growth prospects remain stable and US$ strength should be expected to moderate. This will serve to support valuations, but not necessarily lead them to move higher, especially as the Fed expected to raise interest rates in 2015.

Other themes to watch

Moves by PRC to establish rival technology standards (see: http://www.nytimes.com/2015/04/20/business/ibm-project-in-china-raises-us-concerns.html?_r=0).