Earnings season is in full swing, providing new data points for investors to reassess positions. After a careful review of IBM‘s latest report Tuesday afternoon, I see no reason to buy the stock at current prices. The risk-reward trade off is simply not favorable.
IBM reported Q4 earnings per share of $6.13 per share compared to a consensus forecast of $5.99. IBM’s beat was of low quality, primarily due to items such as share repurchases, foreign exchange and tax rates.
Of special note is that revenue fell 5%, year over year to $27.7 billion. Analysts were looking on average for $28.25 billion. More important is that for the first quarter of 2014, IBM sees EPS of $2.50 compared to consensus of $3.27.
IBM did not do well in high-growth BRIC countries. Revenue declined 8% in Brazil, Russia, India and China.
Take a look at revenue declines in some segments of IBM business: System z mainframe revenues fell 37% compared to the year ago period, revenues for System x declined 16%, System Storage dropped 13%, Micro Electronics OEM was down 33%, and Global Technologies Services sales declined 4%.
IBM expects to generate $18 in EPS in 2014 and $20 in 2015, giving it a forward P/E of less than 10 times earnings, but top-line growth is the problem. IBM is managing its earnings primarily through share buybacks. The company has been shrinking its float by roughly 1% every quarter. Today, IBM has about half the number of shares outstanding compared to 20 years ago. In Q4, IBM purchased $5.8 billion of its stock compared to $3 billion in the prior year period.
CEO Ginni Rometty tried to put a positive spin on the results but said that she and her staff would forego personal annual incentive payments to the senior management.
From a technical perspective, IBM stock has been weak for most of the past year. It was the only loser in the Dow Jones Industrial Average in 2013. Changing hands for less than $182 after-hours Tuesday and pre-market Wednesday, shares could easily fall back to October and December lows in the $172 to $174 range. If the overall market weakens, the stock price could approach $150.
Of note is that IBM has lagged far behind the likes of Amazon, Microsoft and Google in the fast growing cloud computing business.
Given IBM’s large share buyback program, and a promise of EPS of $20 in 2015, $150 is likely a floor for the stock. However, in view of continuing revenue declines, it is questionable whether the company can meet its $20 EPS target for 2015.