IBM's Earnings Target Doesn't Compute
For IBM, talk isn't exactly cheap.
That much was clear in the reaction to Big Blue's analyst meeting on Wednesday, at which it maintained its target of delivering $20 in operating earnings per share in 2015. Despite that promise, shares of International Business Machines IBM -1.81% slipped, adding to a steady decline since the company reported disappointing first-quarter results last month.
Even more notable is how the stock has lost nearly 6% against a 30% increase in the Nasdaq Composite since IBM's last analyst day in February 2013. The $20-per-share target was promised there as well, but investors have grown more skeptical since.
IBM had a reputation as a reliable generator of earnings-per-share growth despite challenges to expand its enormous revenue base. But that is looking tarnished these days. Earnings fell more than 15% in the first quarter from the year-ago period, with IBM reporting its eighth consecutive quarterly revenue decline year over year.
Today's tech investors are all about revenue growth, and IBM chief Virginia Rometty went on the offensive Wednesday, promising growth "in the right places," which includes hot areas such as big data and the cloud.
But that stopped short of promising revenue growth for the company as a whole, which is a bigger ask for a business of IBM's size. The company said it has made 43 acquisitions since the beginning of 2010, but revenue has expanded by just a little over 4% in that time. To deliver 10% annual revenue growth now would require IBM to find about $10 billion in new sales in a market where its big rivals are hunting for precisely the same thing.
The challenge of doing that explains why IBM maintains its focus on delivering higher earnings growth. But the target of $20 a share for 2015 implies growth of almost 23% over a two-year period, which looks ambitious. And IBM admitted Wednesday that it faces a "tax headwind" of about $1.50 a share against that goal. Moreover, based on the company's current forecast, share buybacks will account for less than half of the expected growth.
So reaching next year's earnings goal is no sure thing. The revenue picture remains unclear and the company must deliver on promises to arrest the losses in its hardware business. At about 10 times forward earnings, the stock's valuation isn't terribly demanding. But given the uncertainty around IBM's growth potential, and the risk that it misses its earnings goal, investors shouldn't see that as a compelling reason to buy.