<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of Top 20 IT companies' stock and business performances  (Dec 31, 2008)

Annex Bulletin 2008-24                             December 31, 2008

A partially OPEN CLIENT edition


Big Blue Takes Chill Off Wall Street's Spring (Analysis of IBM's first quarter business results)

Squeezing the Consumer Dry (Greed fueled both bankers & oilmen's try to squeeze blood out of stone - consumer)



Updated 12/31/08, 12:50AM MST

Analysis of Top 19 IT Companies' Market & Business Performances

"Mr. Murphy's Year" Mercifully Ends

Market Cap Drops 38%, But IT Revenues, Earnings Continue to Grow

SCOTTSDALE, Dec 31 I know, sometimes we would rather not know.  Well, sorry.  If you're one of those people, you can always skip this Annex Bulletin and go straight to your New Year's Eve party.  But our job is to let the chips fall where they may, and then try to make some sense out of the pattern.  So if you do want to find out what the markets did to the Top IT firms in 2008, be sure you are seated, and then read on...

Guess it would be fair to say that 2008 was the "Mr. Murphy's year" when it comes to market cap - a year of severe carnage ("when something can go wrong, it will," as Mr. Murphy would have put it in his famous "law").  The traders wiped out nearly half a trillion of the Top 20 IT companies' asset value since April, the last time we took their temperature (see IBM "Places" By a Nose over Google - Analysis of Top 20 IT Cos stock and business performances).  Actually, make that a Top 19 now, as EDS vanished into the bowels of HP in the third quarter. 

The market cap is down 38% for the year, about the same as their wider peer group (the S&P 500) declined this year.  Yet the number actually understated the carnage.  Since late July, when many of these stocks reached a peak this year, the drop is even more precipitous.  In IBM's case, for example, the company's market cap plummeted 47% in the four month period between July 24 and Nov 21.  The market cap did recover in the last five weeks of 2008, but IBM shares are still down 20% for the year.

Overall, Microsoft retained the #1 ranking among the Top IT companies, but its lead over IBM shrank in a relative sense.  IBM also retained the #2 spot, widening the gap between its market cap and that of Google.  Apple, on the other hand, one of the highflyers in the last couple of years, slid from #5 to #7, while Oracle moved up from #7 to #4 in the industry.

MARKET Rankings of Annex Top 19 IT: Year of No Winners

For the first time since we have been keeping records like this, 2008 was a year in which there were no winners.  Market cap of all top IT players declined at varying rates.  Interesting, the tiny ACS, a Texas-based services company, ended up on top, with just an 11% drop in value.  It was followed by another global IT services firm, Accenture, whose market cap declined 14% since April, even though its business continues to boom (see Accenture: Bright Beacon in Sea of Gloom & Doom, Exceeds expectations; lowers outlook), and by CA and Oracle, two software vendors.

At the other end of the scale, we find Sun Micro, Yahoo, Dell and Intel with a dubious distinction of being the industry leaders in market value losses.

Market cap/equity. Accenture ascended to the top of our market cap/equity rankings the last time around (in our April report), and has retained its position since then.  This is a market gauge that we called a "fluff ratio" 10 years ago, since it reflects investor perceptions of intangible over actual book values.  For years, Dell used to be the leaders in this category.  Now, it has slid to #4 position.

Lexmark, Sun Micro and CSC are the least appreciated among the Top 19 in this ranking criterion.

P/E Ratio. When it comes to the price/earnings (P/E) ratios, a measure of the market perception of a company's current and future earnings capacity, the internet consumer stocks are still at the top of the rankings.  Google, Yahoo and Apple are among the top five.  Oracle is the top "enterprise" level vendor at the in this category, along with Fujitsu, which is there mostly because its earnings are so low that the P/E ratio makes it look rosier than it is.

At the other end of the spectrum, we find the "usual suspects," CSC, Dell and Lexmark, but also interestingly IBM.  Which only goes to show us how undervalued the IBM stock is again at the moment.  The reason IBM is in the cellar in this category is the exact opposite to Fujitsu's.  Big Blue's earnings are looking high relative to the current share prices.

BUSINESS Rankings of Annex Top 20 IT

Net Earnings.  The old veterans of the global IT wars are still the companies that are making the most money, market turmoil and recessions notwithstanding.  Microsoft, IBM, HP, Intel and Oracle top the list of the Top 19 IT firms in terms of net earnings.  But the relative newcomers, like Google and Apple, are also still holding their own. placing right under the industry veterans, even though they have significant exposures to the fickle consumer markets.

Sun Micro is the only company among the IT leaders that actually lost money, which is why it is at the bottom of the cellar.  Which in and of itself is actually a rather optimistic statement.  That 18 out of 19 companies are making money, some a lot of money, in an environment that's been described as the "worst recession since the Great Depression," says a lot about the resilience of the IT industry that Wall Street doesn't seem to fully grasp.  All through the year, investors seemed to throw IT babies out with the bathwater (see "Big Blue Stock Sags on "No News" Days  and Accenture's "Par Excellenture" Quarter as some examples).

Revenues.  If size matters, then HP, IBM and Dell are the most important companies in the industry.  For, they occupy the top three spots in terms of revenues among the Top 19 IT leaders.  Microsoft, Fujitsu and Intel follow.

At the opposite end of the scale, we have Lexmark, ACS and Yahoo, the only companies among the Top 19 leaders with revenues under $19 billion.

Equity.  Shareholders equity used to be a measure of a company's durability and stability.  Rather than disburse its profits to shareholders by way of dividends or buybacks, vintage companies would retain a lot of earnings with which to fund future growth and expansion. 

That's clearly no longer the case.  The oldest company in the industry, is now only #5 in this category, having been just surpassed even by the internet upstart Google.  HP, Intel and Microsoft top the list of the IT leaders in this ranking slate. 

Interestingly, Accenture, a very profitable company that leads the industry in several market categories as you have seen from our reports, is at the very bottom of the list when it comes to shareholders equity.  We attribute that to its legacy as a partnership, which is what the company was when it was known as Andersen Consulting, or a part of Arthur Andersen before that.  Evidently the partners, now company executives, still like to get paid at the end of the year rather than keep a lot of earnings inside the company.


Gloom and doom?  Not in the IT industry.  As you could see from the preceding analysis, even at a time when Wall Street has decimated the market values of top IT companies, they are making a ton of money, both individually and collectively (18 out of 19 are profitable, some VERY profitable).  Overall, the Top 19 companies' earnings are up about 6%.

Furthermore, the IT leaders are still GROWING.  Revenues are up 6% on an annualized basis.  And that's in the middle of a severe RECESSION. 

Of course, we still don't know the fourth quarter numbers.  They may knock down the growth rates somewhat.  But the first company to have already reported its business results that include a part of the fourth quarter - Accenture, has done very well despite the economic challenges (see Accenture: Bright Beacon in Sea of Gloom & Doom, Exceeds expectations; lowers outlook).

So overall, to paraphrase Mark Twain, "the news of the IT industry demise is grossly exaggerated." :-)

Happy New Year!

Annex Clients: CLICK HERE for detailed table of the Top 19 IT Cos.

Happy bargain hunting!

Bob Djurdjevic

Click here for PDF (print) version

For additional Annex Research reports, check out... Annex Bulletin Index 2008 (including all prior years' indexes)

Or just click on SEARCH and use "company or topic name" keywords.

Volume XXIII, Annex Bulletin 2008-24
December 31, 2008

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
Tel/Fax: +1-602-824-8111

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Also check out...

Accenture: Bright Beacon in Sea of Gloom & Doom (Exceeds expectations; lowers outlook)

HP Fails to Lift Market (HP lifts page out of IBM playbook; "A Tale of Two Blues" updated)

Facts Fight Back Fears (IBM releases detailed third quarter results)

Fear Trumps Fact (There is total disconnect between stock market & business fundamentals)

Accenture's "Par Excellenture" Quarter(Blowout 4Q lifts Accenture over EDS to #3 spot in IT services world)


Just Say No to Greed 2! (Proverbial IT babies being thrown out with Wall St bathwater)

"Beat the Street" Drumbeat Continues (Analysis of HP's 3Q08 business results)

Big Blue Stock Sags on "No News" Days (Analysis of IBM institutional shareholdings)

IBM Delivers Explosive Quarter (Big Blue firing on all cylinders - analysis of 2Q08 results)

MacAttack Falters at Foot of Mount Vista (A story about yet another attempt to break away from Windows)

Minting "Green" into Greenbacks (An update to our five-year forecast for IBM)

Better Late Than Never - Analysis of a rumored HP takeover of EDS

IBM "Places" By a Nose over Google - Analysis of Top 20 IT Cos stock and business performances

Big Blue Takes Chill Off Wall Street's Spring (Analysis of IBM's first quarter business results)

Just Say NO to Greed - Killer of Dreams! (An editorial comment about subprime financial crisis)

The z10 Lifts "Big Green" (Analysis of IBM's new mainframe announcement)

HP Beats the Street Again (Analysis of HP's 1Q08 business results)

Capgemini's Great Valentine's Day Gift (Analysis of Capgemini's 4Q07 and FY07 results)

Profit Drops, Stock Follows (Analysis of EDS's 4Q07 results)

Profit, Revenue Surge, Lifting Stock, Too (Analysis of CSC's 3Q08 results)

Services, Emerging Markets Boost IBM (Analysis of IBM's full 4Q07 results)

Big Blue Shines in 4Q (Analysis of IBM's preliminary 4Q07 results)

Microsoft Still Wall Street Darling (Analysis of institutional holdings of Top 10 IT Cos)