Slowing demand for traditional mainframe computers has also slowed earnings growth for this computer software titan, but a big acquisition in cloud computing and analytics software positions it for future gains that exceed forecasts.
The company also continues to invest heavily in new technologies; in the third quarter of 2018, its research costs totalled 6.7% of its revenue.
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INTERNATIONAL BUSINESS MACHINES CORP. (New York symbol IBM) is one of the world’s largest computer companies with operations in over 175 countries.
In response to slowing demand for its traditional mainframe computers and related services, IBM is aggressively shifting into faster-growing fields. They include cloud computing services (the storage of files and programs using the Internet) and analytics software (including its Watson supercomputer) to process increasingly large amounts of data.
As part of that strategy, IBM has bought Red Hat Inc. (New York symbol RHT). That firm is a leading developer of software for cloud-based computing systems. They let users access files and programs stored on remote servers over the Internet. Red Hat’s programs use the open-source Linux operating system. That lets it adapt its software to work on a wide variety of computer hardware and cloud systems.
If you include Red Hat’s debt, the total purchase price is $34 billion. IBM completed the acquisition by the end of 2019.
Big purchases typically come with hidden risks, which is partly why IBM’s stock has declined by 21% in 2018. However, Red Hat’s expertise will help IBM’s cloud business compete with Amazon.com and Microsoft.
The company also continues to invest heavily in new technologies. In the third quarter of 2018, its research costs totaled 6.7% of revenue.
Thanks to that spending, IBM won a record 9,100 U.S. patents in 2018, including over 2,000 for cloud computing and 1,400 for artificial intelligence. This was the 26th consecutive year the company received more patents than any other firm. Licensing out its intellectual property generated over $1 billion for IBM in 2018.
On the dividend front, IBM last raised its quarterly dividend with the June 2018 payment. Investors now receive $1.57 a share, up 4.7%, to $1.57. The new annual rate of $6.28 yields a high 4.7%.
The company reported lower earnings and revenue for the fourth quarter of 2018. However, those results beat the consensus forecasts and have increased its profit outlook for 2019.
In the three months ended December 31, 2018, IBM’s overall earnings fell 7.5%, to $4.42 billion from $4.78 billion a year earlier. Due to fewer shares outstanding, per-share profits declined 5.3%, to $4.87 from $5.14.
Those figures exclude unusual items such as costs related to recent acquisitions, changes to IBM’s employee pension plans and items related to the new U.S. tax code. On that basis, the latest earnings beat the consensus estimate of $4.82 a share.
Also, IBM’s revenue in the quarter fell 3.5%, to $21.76 billion from $22.54 billion a year earlier. That also beat the consensus estimate of $21.73 billion. If you factor out exchange rates, revenue declined 1%.
The revenue slip was mainly due to slowing demand for IBM’s Z mainframe computers, which it launched in 2017. That caused revenue for its Systems business to drop 21.3%.
Excluding currency rates, revenue from Strategic Imperatives (IBM’s cloud, analytics and other new businesses) over the past 12 months was $39.8 billion, or 50% of total revenue. That’s up 9% from the same period a year earlier.
The company now expects to earn at least $13.90 per share in 2019, which is higher than the consensus forecast of $13.81. The stock trades at just 9.6 times that new forecast. That’s a particularly attractive multiple, as IBM continues to spend around 7% of its revenue on research. Those outlays depress current earnings and boost the company’s p/e.
I have no present plans for direct investment in U.S., but most of your recent emails to me seem to concern companies trading on NYSE, If you can customize at this level, please give me Canadian news only. Your research and recommendations are much appreciated. r
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I have no present plans for direct investment in U.S., but most of your recent emails to me seem to concern companies trading on NYSE, If you can customize at this level, please give me Canadian news only. Your research and recommendations are much appreciated. r
Thanks for your comment. IBM is just one of many stocks we cover — along with a wide range of Canadian stocks across our various newsletters.