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Analysis of IBM’s Fourth Quarter Business Results

Start of a Real Turnaround?

Best Growth in Four Years, Yet IBM Stock Drops 6%; Big Blue’s January Blues Continue Despite a Watershed-type Report, New Investment Strategy

PHOENIX, Jan 17 - Big Blue’s latest report card showed its best growth in four years.  IBM’s fourth quarter business results, released on Thursday (Jan 16) after the markets closed, signaled that a real turnaround may be in the making. 

Led by IBM Global Services (IGS) unit’s (without maintenance) growth surge of 19% (+15% in constant currency), IBM revenues were up 7% in the fourth quarter.  Even its lowly hardware segment eked out a 1.3% growth, after the company successfully jettisoned its money-losing storage business to Hitachi on Dec 31, 2002.

IBM net profits declined as expected (56%), but Big Blue did beat the Wall Street consensus adjusted for one-time charges ($1.34 EPS vs. $1.30 consensus EPS). 

So how did Wall Street react to the most encouraging report card IBM has submitted in years?  It dumped the Big Blue stock.  IBM shares took a 6% dive Friday after its fourth quarter results were released.

It figures… Big Blue’s January blues are upon us once again.  The pattern seems the same every January.  The overly exuberant analysts and investors boost the stock on rumors and pan it on facts (see Up on Rumors, Down on Facts, Jan 19, 1999; A Slam-Dunk of Bunk, Jan 20, 2000; IBM Ends Year with a Bang, Jan 19, 2001; Big Blue Stock to Take a Dive?; Jan 19, 2002).  


Our report then goes on to describe in detail the performance of various IBM business units and the reasons we feel that a real turnaround may be in the offing at Armonk:

Business Segment Analysis

IBM Global Services.  And how good were the IBM Global Services results?  As good as it gets.  Or at least as good as they’ve been in at least four years.  One has to go all the way back to the fourth quarter 1998 to find anything resembling the growth IGS has just reported (19% vs. 20% in 4Q98 - see Up on Rumors, Down on Facts, Jan 19, 1999).  


Hardware.  After successfully completing the sale of its money-losing storage operations to Hitachi, the remaining IBM hardware segments managed to turn in a meager growth in the fourth quarter (+1.3%).  For the full year, however, hardware revenues were down 10%.


Software.  IBM software revenues were flat in the fourth quarter (down 2% in constant currency).  For the full year 2002, software managed a meager (1%) growth. 


Geographies.  In a switch from the declining trends of the last year or so, all IBM geographic units reported growing revenues in the fourth quarter (see the chart).


New Capital Spending Strategy

Perhaps the greatest positive change in IBM’s report card has been its reduction in capital spending on share repurchases, and its new focus in investments for growth, both internally and through acquisitions. 

Stock buybacks, one of the biggest drains on IBM cash, had all but dried up in the fourth quarter.  After averaging about $1.6 billion in quarterly share repurchases for over six years, IBM spent a mere $74 million in the fourth quarter.    


But if the new Big Blue stays the course by continuing to invest for growth - internally and through acquisitions - instead of turning over its cash to Wall Street, chances are we may see the IBM equity growing again.  AND its market cap, too.

A result could be that the IBM “fluff ratio” gets to contain more substance and less fluff.  Which would be good news for IBM shareholders and for long-terms investors.  Those who have been dumping their IBM stockholdings today have obviously short-sighted goals in mind.


"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (12 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2003: “Start of a Real Turnaround” (Jan 17)

2002: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 21), "Sir Lou OutLayed Lay!" (Apr 1), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002).

A selection from prior years: Is IBM Cheating on Taxes (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

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Volume XIX, No. 2003-01
January 17, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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