Summary
- IBM low multiples and high dividend yield makes it look attractive.
- An in-depth look reveals a company that is struggling.
- Board needs to answer why it retains Rometty for destroying shareholder value.
Source: NYT
Thesis
From a distance, International Business Machines (IBM) appears like a good investment for value investors. The company has a market value of about $119 billion, annual revenue of more than $77 billion, and net income of more than $7 billion. Its 4.8% dividend yield and stable cash flows make it seem like a good company to own. However, a closer look shows a mismanaged fallen angel. A company with no clear path to becoming great again. Its legacy businesses are struggling, and its strategy in cloud is not working as well.
Introduction
I have followed IBM closely for almost a decade. It was among the first companies I ever invested in. I published my first article on the company – the big blue is fading – in 2017. In my follow-up article on the company in 2018, I lamented about the sad decline of the company. In another article, I argued that the company could still be saved. In the past few months, I have refrained from writing about the company because I wanted to monitor its integration of Red Hat. I was against the overpriced transaction from the word go.
Earnings Recap
IBM released its third-quarter earnings on October 16, and as always, Virginia Rometty was not available during the earnings call. I don’t understand why she does this. In the quarter, the company had revenue of $18 billion, which was $191 million below analysts’ estimates. Revenue declined by 3.88% from a year ago. Earnings came in at $2.68, slightly above estimates.
Cloud & cognitive software revenue rose by 8%, while Global Business Services revenue rose by 2%. In my article about how IBM could be saved, I explained why the company needs to divest this segment. It is a low-margin segment that has the most employees. Global Technology Services revenue declined by 4%. Systems revenue declined by 14%. The company generated $1.8 billion in free cash flow in the quarter and $12.3 billion in the trailing 12 months.
