The technology sector continues to take a pounding from the Coronavirus. The demand for enterprise IT products is in free fall. Look no further than the International Business Machines Corporation (NYSE: IBM).
Today we will discuss why IBM made headlines this week and discuss whether it is worth the investment at its current trading price.
Why did IBM make headlines this week?
1. Q1 2020 Earnings
- Cloud & Cognitive Software sales rose by 5.5% = U.S. $5.24 billion.
- Red Hat revenue was up by 18%.
- Systems revenue increased by 3% = U.S. $1.37 billion.
- Z line mainframe computer sales soared by 59%.
- Total revenue fell by 3.4% = U.S. $17.57 billion.
- Net income slumped by 26% year-on-year = U.S. $1.18 billion.
- Global Technology Services sales were down 5.9% YTD = U.S. $6.47 billion.
- Global Business Services revenue was down 0.5% = U.S. $4.14 billion.
The COVID-19 outbreak has severely crippled IBM’s earnings in several markets. This was echoed by IBM’s Financial Chief, Jim Kavanaugh, “Towards March, the health situation and resulting social distancing became more widespread. Consequently, we saw a noticeable change in client priorities. With that, there was effectively a pause, as clients understandably dealt with their most pressing needs. This was most pronounced in our software business.”
IBM shares retreated by 1.4% during yesterday’s trading session. This follows the company failing to meet the quarterly earnings expectations of many market analysts.
2. CEO’s “Straightforward” Approach
Newly appointed CEO, Arvind Krishna, has vowed to turn the fortunes of IBM around, after seeing sales fall by 2.4% on average for the past decade. “I am going to focus on growing the value of the company. This includes better aligning our portfolio around hybrid cloud and AI to meet the evolving needs of the market. We will continue investing, including acquisitions.”
However, as part of the restructuring of the company, Krishna will be laying-off an “unnumbered” amount of staff. Market analysts forecast that this may be in the realm of a few thousand.
Is IBM worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice, only general commentary from my extensive research in this area.
Short answer: Yes (opinion not advice).
Before the outbreak of COVID-19, IBM posted a “mixed bag” of financials. Making some investors apprehensive about buying.
It’s not all “doom & gloom” when it comes to IBM’s financials. In 2019, IBM posted a cash flow to assets analysis result of 0.5. When compared to the generally accepted standard of 0.3, the company has a very efficient asset structure. This was accompanied by increasing gross & net profit ratios of 47.3% & 12% respectively.
The increases in gross & net profit can be attributed to a 4.1% fall in IBM’s expense ratio to 25.6%. All this combined enabled IBM to post a ROI ratio of 45.3%. When compared to Amazon’s ROI ratio of 18.7%, this is simply a phenomenal return.
Despite the pleasing financials, we must address the negatives of IBM. Because YIG believes that every investor deserves a balanced perspective.
The company posted a 3.1% decrease in revenue in 2019 when compared to the prior year. This was reflected in the EPS value of 10.1.
Also, IBM’s current ratio deteriorated by 26.7% to 101.9%. This was accompanied by a D/E ratio of 629.5%. While this was lower than the previous year; when compared to Tesla’s D/E ratio of 405.6%, IBM is very highly geared.
A Final Word
Personally, I see IBM as a viable long-term investment. Year-after-year, the company continues to handout lucrative dividend payouts to investors. Moreover, with nearly 100 years of business experience, management at IBM should be able to navigate through the economic storm.
However, if the company prioritises growth in the coming years, it may compromise its earnings & dividend yield as it acquires more companies & infrastructure. It will be interesting to see how IBM’s shares perform over the next decade. Thus, a short decline followed by long-term growth should be in store for IBM investors.(opinion, not advice)
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Sergeo Domtchenko, Associate of YIG.