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IBM Another Earnings Disappointment

IBM reported in-line earnings on Thursday, 1.18.2007, after the market close. As we expected, the stock swiftly met a flurry of sell orders pushing it down 5% in after hours trading, on very heavy volume.  The earnings report content was relatively uneventful from a superficial read.  But under the hood...

Earnings Were of Low Quality

IBM showed very little growth despite its hefty valuation, and PE multiple.  To wit, hardware revenue was flat minus currency gains.  Services, the bulk of IBM's revenue, saw a meager 3% gain minus currency.  We detailed in our IBM Mini-Re that earnings growth through cost cutting is no growth at all, and investors are apparently catching on. 

Finally, IBM booked roughly $17 billion in potential business through new services signings.  But it is worth repeating here, future signings is a profitability screw that can turn both ways. In other words, contractual obligations if not managed correctly can quickly turn into losses. 

The signings now hang like the sword of Damocles over IBM's services division which has a tendency to misappropriate the resources that actually drive large contract profitability.  Selling $17 billion in services, and delivering $17 billion in services are two entirely different skill sets.  The market remains unconvinced of IBM's execution of the latter.

Market Conditions

We usually pay little attention to the day to day swings of a single stock or the market in general, so what's riveted our interest?  Simple.  The market's consistent reaction to relatively good superficial news from companies such as IBM, and Apple.  If this were the beginning of the bull market or even the midway point, IBM shares would have risen.

We have noted--investor portfolios have too--that the market continues to sell or ignore good news.   This is indicative of a bear market, or at least a severe correction. 

One does not win a popularity contest stating the bear case, but the market is what it is:  richly valued and fraught with risk.  Our models have been cautioning for some time that the market is over valued and vulnerable to sharp set backs.  Bullish capitulation will suffer lethargy just long enough to induce bearish complacency. 

Technically Speaking

IBM should find brief support at the $94 area followed by a layer of support near $85 as it begins its trek back down towards more modest valuation. Based on our research, the $75 price area represents the first stop in fair valuation for IBM, but that does not preclude even lower pricing.

We maintain our sell rating on IBM based on our enterprise business model findings, valuation, and overall pricing softness in the information technology industry.  Technology is mature, and IBM's enterprise business model is now passé.    

Disclosure:  Neither the analysts nor the employees of Financial Trader Research© or FiancialTrader.com© hold any positions or interests in the equities covered in our analysis of IBM above.  Financial Trader Research does not receive any compensation, in any form, from the companies that we cover.  We create simple, straight forward, and independent world class research, and decision support tools.

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