Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Tech Recovery Not All High Speed?
Last week, chip giant Intel (INTC – Free Analyst Report) spurred investors’ optimism that the recovery in the technology sector was picking up the pace, as the company labeled the second quarter its best ever. Indeed, the top and bottom lines came in above expectations, and Intel credited the bulk of the strong performance to higher customer spending on the corporate side.
Following the release, shares of semiconductors, such as Advanced Micro Devices (AMD), quickly took off, as did other tech names like Hewlett-Packard (HPQ - Free Analyst Report), Dell (DELL), and Cisco Systems (CSCO - Free Analyst Report). It had appeared to investors, at least at that point, that the sector’s rebound was progressing at a faster-than-anticipated rate.
On the surface, there were some positives to be pulled from IBM’s June-quarter report. In fact, in the three-month period, the company generated earnings of $2.61 a share, just a penny more than our estimate and a 13% advance over the $2.32 tally registered in the year-earlier period. The company’s revenues only advanced 2%, which was below our expectation of a 4%-5% increase, but margins expanded, with expense reductions offsetting currency headwinds and the effect of acquisitions. The tax rate declined slightly and stock repurchases enhanced share net.
The top-line showing, it seems slightly unnerved investors. That said, the mixed revenue performance was attributable to a number of factors, both positive and negative. On the one hand, sales in emerging markets rose at a double-digit pace. Too, in the software segment, key branded middleware grew 9%. In the computer hardware business, revenue was driven by good growth in IBM's System x servers, disk storage, point-of-sale retail systems, and microelectronics. Global business services revenues increased 3%, with strength in areas in which IBM has been investing, such as business analytics.
On the other hand, currency headwinds (the strengthening U.S. dollar versus the euro) penalized revenue growth by 2%-3%. In addition, total revenues would have been about a percentage point higher if not for the divestiture of a software operation at the end of the March quarter (revenue within the software segment would have risen 6% rather than 2%.) Also note that IBM has transformed itself over the past few years into largely a software and services company, so top-line growth isn't getting as big a boost as some other computer and peripheral companies from the recent pickup in sales of hardware (which advanced 3% but only accounts for 17% of IBM's total revenues).
Looking forward, despite flat services signings, IBM says it has a good pipeline of services deals going into the September quarter and expects its services margins to strengthen in the second half. Management expects the good growth in software revenue to continue. Further, the introduction of new entry-level and high-end server systems in the September period should lift hardware revenues. Recent efforts to rein in expenses will also continue.
Although currency shifts could continue to restrain revenue growth, the company expects to earn at least $11.25 a share for all of 2010, and we continue to look for share net of $12.35 in 2011. Meanwhile, this stock has worthwhile appreciation potential over the pull to 2013-2015.
Shortly after IBM’s report, shares of chip maker Texas Instruments (TXN) also traded lower, as top-line expectations here also fell short. Despite share net that more than tripled that of a year earlier, revenues of $3.50 billion falling just below the Street’s $3.52 billion consensus was enough to add to the sour taste investors had for the tech sector today.
At this point, it seems many are unsure what to make of the tech recovery. At least until more of the group’s big names such as Apple (AAPL) and Microsoft (MSFT - Free Analyst Report) add to the story when they reveal their latest results over the next few days.