<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of Top IT Cos' stock market & business performances (Oct 5)

Annex Bulletin 2009-18                            October 5, 2009

A partially OPEN edition



A Rally of Hope over Fact (Analysis of Top IT cos' latest market and business performances)


A Fading Star (Analysis of Accenture's 4Q09 business results)



Updated 10/05/09, 9:30AM HIT

Analysis of Top Global IT Companies' Market & Business Performances

A Rally of Hope over Fact

Top IT Companies' Market Cap Surges by 40% Even If Their Revenues, Earnings Drop; Apple Stock Gains the Most, IBM Lags Behind

HAIKU, Maui, Oct 5 A stock market rally that began late in the first quarter, rolled through the second, and gained momentum in the third trimester of 2009.  Just as a high tide lifts all boats, even the leaky ones, so did this surge of investor optimism boost the market cap of the top 18 global IT companies we follow.  Their aggregate valuations are up by 40% to $1.35 trillion, even though their revenues are down 6%, while their earnings tumbled 20% since the start of the year.

In short, this has been a rally of hope over fact; of wishful thinking over actual profits.  Price/earnings (P/E) ratios are up, partly on the basis of declining earnings.  P/E ratios are the only market indicator that has grown solidly across the board for most of the top IT leaders.  The trailing and the forward 12-month P/E ratios are up 31% and 21% respectively.

The lower the earnings, the higher the P/E ratios, all other things being equal.  And declining earnings is hardly a solid foundation for a sustained rally.  You would think, anyway.  But Wall Street doesn't think.  It feels.

It feels? 

Yes, Wall Street feels its way through clients' money.  Investors may think of themselves in masculine terms, like some Star Wars supermen.  But they actually act much more like the readers of Better Homes & Gardens, Vogue or Allure... when they shop on impulse and emotion.

And what about all those spreadsheets?  They are a cover.   Like the fan to a fan dancer or a bikini to a model.  To cover the naked truth.  Or the facts.  As that trial lawyer tried when he slipped up in his summation to the jury by telling the truth: "And those, ladies and gentlemen of the jury, are the conclusions upon which I based my facts." 

As a result, when something as fickle as people's mood fuels a rally, market cap gains can be here today and gone tomorrow.  The first two trading days of the fourth quarter are demonstrating that very point.

MARKET Rankings of Annex Top IT Companies

Meanwhile, if we look back at what happened in the marketplace in the last three months, we will find that the two old industry behemoths - Big Blue and Redmond Blue (IBM and Microsoft) - were the only IT leaders whose share values have not quite kept up with the general stock market euphoria.   Apple, HP, Cisco, Google... have all outperformed, both the market and the two largest companies in the IT industry when it comes to market cap (right chart).

Oops... correction.  In the process, Apple has now leapfrogged IBM and is the second largest IT company in the world in terms of market valuations.  "An Apple a day keeps doctors away?"  And not just an Apple.  Google, too.  IBM has barely managed to hang on to the third place, with Google now also nipping at its heels (left chart).

Cisco is the fifth, a fair distance apart.  Further back, HP, Intel and Oracle are bunched up together as sixth, seventh and eighth largest IT competitors in market cap.

And then, there are the rest of the "IT majors"... quite a bit behind the eight leaders.

Change Analysis

As a group, the Top 18 have gained $389 billion in market value even if their earnings slipped 20% since the start of the year.  Apple led all leading IT vendors with a 116% market cap gain.  Google and EMC share surged by 60% each, while CSC, Dell and Yahoo gained 50%, 48% and 42% respectively.

At the other end of the spectrum, Lexmark was in the cellar, with Oracle, Accenture and CA above it.  Their market cap gains were in the teens (right chart).

If anyone's top ranking is well deserved, it is Apple's.  Apple was the only company among the Top 18 leaders we follow to have reported growth in both revenues and earnings.  Google also grew revenues, but its profit dropped.  IBM, CA and CSC also increased their earnings, but their revenues declined.  So "an Apple a day keep bears away," might be a Wall Street version of the old saw.

At the bottom end of the scale, we have Intel, Dell and money-losing Fujitsu - all companies whose market cap increased by 30% to 48% since the start of the year. 

See what we meant about Wall Street "feeling" its way through clients' money?

While shareholders of these declining companies may have reasons to feel good right now, on the opposite end of the spectrum we have holders of stock in solid companies that have performed well on Main Street, and are not getting commensurate credit on Wall Street.  The foremost among them is Big Blue whose stock is again undervalued relative to its peers.

IBM at $137? 

Why Not, If Apple Is at $186; Google at $490; EMC at $17?

Oh sure, IBM's market cap also increased by 39% since the start of the year.  But that's pittance compared to surges of other IT companies' shares whose profits have declined.  If IBM Investor Relations people had done a comparable job to that of Apple's, Google's, or EMC's, the Big Blue stock should have risen at least 50% to 60%.  That would put them at about $137, which is the all-time high the IBM shares reached in July 1999.

After all, Apple, Google, EMC are still off of their multi-year highs event though their market cap has surged between 50% and 116%, as you saw from the preceding charts.

Or take a look at HP, for example.  It has had three losing quarters in a row. The IT industry's largest company is actually shrinking at both the top and bottom lines.  And it would be seen as contracting even more if it had provided an apples-to-apples comparison in its results relative to the EDS acquisition.

Yet, as you can see from the stock price charts (right), HP shares have outperformed not just IBM's and Microsoft's in the last three months, but also Google's and Cisco's - other top six IT market cap leaders. 

So you have to give Mark Hurd and the HP Investor Relations team high marks for their work on Wall Street perceptions.  On the other hand, see again what we meant about Wall Street "feeling" its way through clients' money? 

Squandering Shareholder Equity

Meanwhile, Dell, the erstwhile "King of Fluff" (market cap over equity ratio), has now slipped to the fourth place in this chart that used to epitomize Wall Street's fiction over substance views of the industry.  As with "E" for earnings in the case of P/E ratios, if the "E" for equity shrinks, the ratio will grow. 

That is how Big Blue became the new "King of Fluff" in the last few years (having attained the highest market cap/equity ratio among the IT industry leaders).  IBM did it by giving back its equity to the shareholders (mostly Wall Street) through massive share repurchases. 

Despite record earnings in recent years, IBM equity has shrunk by over $10 billion since Big Blue started its massive stock buyback program in 1995 (of well over $100 billion).  The company did it ostensibly in the hope of boosting its share prices.  And you saw what happened.  Wall Street took the money and shrugged.  And then put it into the shares of Apple, Google, EMC, HP... or wherever else's pockets around the world. 

"Smart" move, IBM!

BUSINESS Rankings of Annex Top IT Companies

As for the Top 18 business charts, the pecking order at the top of the IT industry is still pretty much the same, except that most companies have shrunk since the last time we did this type of an update (see "Apple, Google Lead Comeback", July 2009).  Since Microsoft contracted less than Dell, it has now moved into the No. 3 position in the industry, behind HP and IBM.

Lexmark, CA and Yahoo are still holding up the rear in terms of revenues.

As for earnings, despite the gloomy economic picture around the world in the last two years, especially in the last 12 months, only one of the top 18 IT companies has actually lost money.  That dubious "honor" goes to the largest Japanese computer company - Fujitsu.  Yet as has been the case in New York, the Tokyo Stock Exchange traders shrugged off the bad news and boosted Fujitsu's market cap by 30% since the start of the year.

At the other end of the rankings, Microsoft is still king when it comes to IT industry profits ($14.6 billion).  It is followed by IBM ($12.7 billion), which has widened the gap between itself and HP, in third place ($7.3 billion).

Cisco, Oracle, Apple and Google follow in that order, whose net earnings range from $4.6 billion to $6.2 billion.  (All these figures are our estimates based on latest annualized results).

Click here for detailed tables and charts (Annex clients only)

Happy bargain hunting!

Bob Djurdjevic

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Volume XXIII, Annex Bulletin 2009-18
October 5, 2009

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

Tel/Fax: +1-602-824-8111

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