Annex Bulletin 2005-10                      March 17, 2005



Analysis of Global IT Leaders’ Business and Stock Performances  

An Upside-Down View

Wall Street Knows Which End Is Up – If Looking at Companies Upside-Down

PHOENIX, Mar 17 – Getting credit on Wall Street takes a lot more than generating revenue and profit growth.  Or a lot less... Hewlett Packard (HP) executives and shareholders should appreciate that point more than anybody.  The IT industry’s second largest and third most profitable company is dead last in terms of the forward price/earnings (P/E) ratios among the top 16 global IT leaders whose latest business fundamentals and stock market performances we have just analyzed.

In short, the value is there; plenty of it as it turns out in HP’s case.  But Wall Street is blind for looking.  Or it’s looking but not seeing the wheat for the chaff.  Either way, the HP shareholders are taking it in the chin.  Which makes this stock probably the most undervalued among the top 16.

On the other end of the scale, we have Sun Microsystems, CA and EDS topping the list of global IT leaders in the same category (P/E ratios), even though two of the three lost money last year, and one of them (CA) barely broke even.  Clearly, their P/E ratios are based on Wall Street’s hopes and prayers rather than facts and past track record (see the chart). 

But no IT company has been consistently over-hyped and overvalued by Wall Street as Dell.  Its stock’s appreciation in the last two decades dwarfs even that of the much more profitable Microsoft and Oracle (see the stock chart below).

Ironically, even the currently lowly HP stock has done better over the long haul (the last two decades) than did IBM’s, the industry’s biggest and the second most profitable company.  But both computer industry conglomerates, of course, are well back of the more specialized IT value leaders.

So if you’re looking for much logic and reason in analyzing business fundamentals vs. stock market performances, you are bound to be disappointed.  Guess that is the main point of this report.  Wall Street is a casino (also see “Wall Street-Main Street Chasm Widens,” July 2002).  So marketing to it is an art, not unlike hyping up Oscar nominees.  Sometimes smoke and mirrors can produce better results for shareholders than balance sheets and P&Ls.  But not always…


Microsoft, for example, is one place where the twine meet.  Its fundamentals and stock market assessments are more or less in synch.  Monopoly pays.  It always has, even though Microsoft’s is starting to lose some of its shine, both on the stock market and in the streets.

Microsoft is the most profitable IT company in the world in absolute terms, with net earnings of a cool $10 billion.  But it is Oracle that ranks as No. 1 in terms of net margins.  Microsoft is second.  SAP third.

Just how significant IBM’s recovery has been can be seen from the fact that Big Blue is now the world’s second most profitable IT company in absolute terms (behind Microsoft), and is the highest placed IT conglomerate on the profit ladder.

The fact that IBM’s net profit is bigger than HP’s and Dell’s combined, sheds some more light on Big Blue’s recent “quality over quantity” emphasis.  Once again (as with HP), Wall Street seems oblivious to it.

Holding up the cellar of the top 16 profitability rankings are Capgemini, EDS, BearingPoint, Sun Micro and CA, most of the companies that placed at the top of the P/E ratio list.  Which suggests that Wall Street does know after all which end is up – if looking at companies’ profits upside down. J

Dell: Still “King of Fluff”

Even though IBM’s $8.45 billion net profit also dwarfs Dell’s $3 billion, Dell’s market cap-over-equity ratio is three times higher than IBM’s (see the market cap/equity chart).  See what we mean about hype over substance? 

Of course, nothing new there... Dell has been the “king of fluff” since way back (see and “Corporate Cabbage Patch Dolls", Nov 1998).  Both IBM and Dell (and others… Microsoft, Sun, HP, etc.) have thrown tens of billions of dollars at Wall Street in the form of stock buybacks.  But the big difference between the IBM and Dell has been that Dell got a lot more bang for the buck for it.

When it comes to substance (shareholders’ equity), however, Microsoft tops the charts once again.  And even though the 90+-year old IBM is the oldest IT company around, it ranks only third (after Microsoft and HP) in this category.  Squandering $60 billion of shareholders’ money (on stock buybacks) does carry a price.

Oracle and Fujitsu are third and fourth.

Happy St. Patrick’s Day!

Bob O’Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  An Upside-Down View (Mar 2005);  The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

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Volume XXI, Annex Bulletin 2005-10
March 17, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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