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Dow-30 Earnings: International Business Machines – Fourth Quarter 2013
InternationalBusinessMachines (IBM – Free IBM Stock Report) stock fell moderately in morning trading after the global supplier of mainframe computers, software, and services, and a component of the Dow 30, reported December-quarter and full-year 2013 earnings that matched expectations. However, revenues disappointed.
The technology icon reported earnings of $5.73 a share in the final period of 2013, up 12% from $5.13 in the year-earlier term and close to our estimate of $5.71. For all of 2013, IBM earned $14.94 a share, up 4% from the $14.37 logged in 2012, and slightly below our estimate of $15.00. Note that share net for the quarter and the full year included $0.40 and $1.34, respectively, of acquisition and retirement-related charges. On a so-called operating basis (excluding the charges), the company earned $6.13 a share in the December quarter and $16.28 for all of 2013. Both reported and operating results for the full year included about $0.70 a share of workforce rebalancing charges booked in the June period.
Revenues, on the other hand, fell 5% in both the quarter and the full year, or 3% and 2% on a constant currency basis, dragged down by a 26% December-period decline in the Systems & Technology (mainframe and computer hardware) division, and a 9% falloff in developing nations. The quarter was the seventh consecutive period of disappointing revenues. All of IBM's major computer hardware product lines contributed to the top-line decline. The falloff in developing markets was pronounced in China.
IBM's other business lines fared better. Software revenues rose 3% in the quarter, or 4% on a constant currency basis. Cloud computing revenues advanced a strong 69%; IBM's Smarter Planet initiative, which applies its know-how to real life problems, like transportation, increased 20%. Meanwhile, services revenues slipped 2%, but inched 1% higher adjusted for currency. The improvement in these operations, especially in very profitable software, lifted the gross margin slightly, excluding the aforementioned charges.
Operating expenses remained flat, research expenses rose slightly, and pretax income fell 11%. The latter included a roughly $500 million pretax loss in the systems business. Benefits from tax audit settlements sharply lowered the tax rate, from nearly 25% to 11%, allowing net income to rise 6%. Stock repurchases also helped support higher earnings per share for both the quarter and the year. Given the weak overall performance, however, senior management has decided to forgo incentive payments for 2013.
Looking ahead, IBM expects to earn at least $17.00 a share on a reported basis (including $1.00 of acquisitions and retirement charges) in 2014. The company has a good track record of meeting its earnings goals, despite its disappointing top-line performance, and the absence of the workforce rebalancing charges recorded in 2013 should help. So should an eventual pickup in technology spending by corporations, spurred by better economic activity. But the persistent revenue weakness is a concern and Wall Street seems to agree judging by the rough treatment accorded this issue after the latest earnings release, and throughout 2013 when this stock was the weakest performer on the Dow. Meantime, we are tentatively raising our 2014 share-net estimate to $17.00, from $16.10. Note that the company still looks to earn $20 a share by 2015 before acquisitions/retirement charges; about $18.00-$19.00 on a reported basis. In all, this high-quality stock has worthwhile total return potential and is a solid selection for very patient investors, who may want to view the issue's continuing weakness as a good entry point.
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.