IBM Earnings Beat Masked By Negative Real Growth Opportunity

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International Business Machines Corporation (NYSE: IBM) is still one of the most important stocks of the Dow Jones industrial Average, mostly due to its major stock price in the price-weighted index. What will continue to stand out here is that IBM continues to see no real growth if you do not count the stock buyback and cost cuts driving up the earnings per share. Shares may be higher to mixed, but the report is effectively a mixed report at best.

IBM reported earnings of $6.13 in earnings per share. Revenue was down 5% (3% if adjusted for currency) to $27.7 billion in the fourth quarter. Thomson Reuters had estimates of $5.99 in earnings per share (up from $5.39 a year ago) and revenue was expected to have contracted by 3.6% to $28.25 billion. IBM continues to beat earnings due to cost management and stock buybacks, but there is just no growth strategy here.

The one positive force is in the backlog. The total services backlog was up 2% more to $143 billion, but this would have been up 5 percent adjusting for currency. IBM is targeting earnings per share from operations of at least $18.00 EPS in 2014 while Thomson Reuters was at $17.97 EPS for the year ahead. IBM also maintained that it would make at least $20 in earnings per share for 2015.

Net income margin was up 2.4 points to 22.3 percent; and the total operating (non-GAAP) net income margin was up 3 points to 23.9 percent. Here is how much stock is being bought back: The weighted-average number of diluted common shares outstanding in the fourth-quarter 2013 was 1.08 billion versus some 1.14 billion shares in the same period of 2012.

In the quarter, IBM generated free cash flow of $8.4 billion excluding Global Financing receivables, down $1.1 billion year over year. IBM generated free cash flow of $8.4 billion excluding Global Financing receivables, down $1.1 billion year over year. IBM ended 2013 with $11.1 billion of cash on hand.

IBM shares were initially up after the report, but now the DJIA stock’s indication looks down by almost 2.5% to $183.85 in the after-hours reaction. The street’s nick name of “Big Blue” may turn into “Big Who?” if it cannot find avenues for growth ahead.

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