https://www.wsj.com/articles/investors-are-giving-ibm-too-much-credit-1492456825
International Business Machines Corp. needs to prove there is substance behind its big rally. Given the company’s stagnating fundamentals, that might be hard to do.
Big Blue already has transformed itself to software and services provider from a seller of mainframes and PCs. Now it is focused on things like cloud computing and artificial intelligence. Both are part of what IBM calls its strategic imperatives: faster-growing businesses that make up 41% of its total sales. They could hit 50% in the back half of the year.
That growth, which has accelerated of late, explains why its shares have jumped more than 40% over the past 14 months, reversing much of a multi-year slide. Investors fixated on these new businesses are missing a worrisome fact about the turnaround, though. IBM hasn’t made much progress on its top and bottom lines.
The company has logged 19 consecutive quarters of declining revenue as it juggles declines in its legacy businesses. That streak should extend to 20 on Tuesday when it reports first-quarter results. Analysts surveyed by FactSet expect sales to have dropped 2% to $18.4 billion. Overall sales aren’t expected to start growing again for another two years.
Earnings aren’t turning around either. Analysts expect IBM to earn $2.35 a share, matching the year-earlier period. They have kept their earnings estimates fairly steady in recent months. Usually they lower them leading up to an earnings report. That means IBM now finds itself in the rare position of having a higher bar to clear.
Additionally, while only 22% of analysts who cover IBM say the stock is a “buy,” that proportion has almost doubled from a few years ago. Analyst recommendations are often good contrarian indicators when they are near extremes. In mid-2015, IBM had the fewest “buy” ratings in at least 20 years. The stock bottomed months later.
And the company, long a methodical buyer of its own stock, has actually been less so of late. IBM spent $3.5 billion and $4.6 billion on buybacks, respectively, over the past two years, according to FactSet. By comparison, it spent an average of about $14 billion annually on share repurchases over the previous five years.
With the stock up and earnings flat, IBM fetches 12.3 times projected earnings over the next 12 months. That is near its highest forward multiple in the past five years and much richer than the 8.5 times it traded at early last year. Its valuation is also pricier than rival HP Inc. and comparable to that of Cisco Systems Inc.
This reboot needs more time.