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IBM now a wait-and-see stock
The stock is a value at these levels, but the company's disappointing quarterly results raise questions about whether tech spending is hitting a dry spell.
By Robert Walberg
With the technology sector leading the market to new yearly lows on Thursday, what investors didn't need was a big splashy earnings disappointment. Unfortunately, that's just what IBM (IBM, news, msgs) delivered.
The company said sales grew by 3.3% to $22.9 billion, while earnings from continuing operations rose 3.7% to $1.41 billion, or 85 cents a share. Despite the modest increases, which were helped by a soft dollar, Big Blue's sales and earnings were well short of Wall Street's consensus estimates of $23.6 billion and 90 cents a share.
The knee-jerk reaction to the news was almost as brutal as the report, with investors pushing the stock down about 6%. IBM is trading around its lowest level in almost two years, and it's down 10% since I wrote about it on March 24.
In that article, I noted that the brass at IBM deserved credit for moving the company away from hardware into higher profit margin businesses such as software and services. Though there weren't any areas that stood out positively in yesterday's earnings report, software and services revenues were up by 2% and 6%, respectively, compared with flat results for the hardware group. Gross profit margins also improved slightly, to 36% from 35.6% in the year-ago period. In other words, management's overall strategy remains dead on.
The bigger problem
The problem isn't with where the company is headed but where oil prices and the world's economy are headed. It was concern over these issues that apparently resulted in lower-than-expected spending on information technology products and services.
In fact, IBM's management cited difficulty closing deals in the last two weeks of the quarter and troubled economies in certain regions for its disappointing results. Results in France, Germany, Italy and Japan were especially soft. The poor results in Europe have led to speculation that IBM will move quickly to restructure some of its European operations. Look for plant closings and job cuts.
If there's one thing tech companies learned from the industry collapse a few years ago it was how to tighten their belts. Expect IBM to find another notch and pull tight after yesterday's embarrassment.
Other tech companies are likely to follow suit, as the nature of IBM's miss (across the entire company) and the tone set by management, suggest that this isn't a company-specific problem but an industry-wide situation. Fearful of the effect of higher energy prices, corporations -- like consumers -- are beginning to rein in spending. If true, investors can expect several more high-profile earnings misses from the technology sector in the days and weeks ahead.
No room to run
For IBM, management's guarded tone regarding the rest of the year doesn't bode well for the stock over the near term. A few weeks ago I noted that as long as the company met its sales and earnings targets its stock had room to run to around $110.
Well, it obviously didn't meet that threshold, and now the stock is in jeopardy of breaking below pivotal support at $78.73, its August 2003 low. Based on the oversold nature of the stock and the market, that floor should hold for now. But if the stock falls below this level or, more likely, rebounds to around $85 over the next few weeks, investors might want to consider moving to the sidelines.
Long term, IBM represents a compelling value at these levels, and management is clearly wasting no time in responding to the challenging market conditions. But until we get a better handle on whether this is a temporary downturn in technology spending or the beginning of another long dry spell, it's better to be safe than sorry.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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