No Way to Sugarcoat IBM's Weakness
Our long-run view of the tech giant is still intact despite disappointing third-quarter results, but a number of headwinds are impeding IBM's growth, says Morningstar's Grady Burkett.
International Business Machines' (IBM) third-quarter results were disappointing, as the firm continues to struggle to reinvigorate revenue growth in key product categories. We expect to reduce our near-term revenue forecasts, though not materially enough to change our fair value estimate. We still believe IBM can deliver 2% annualized revenue growth and 3% annualized operating income growth, on average, during the next several years. We also maintain our wide moat rating. IBM is likely to trade firmly in undervalued territory Thursday, providing patient investors a relatively attractive entry point for a core technology equity holding.
Although we maintain our long-run view, there's no way to sugarcoat IBM's recent weak performance or the intermediate-term challenges still ahead. Total revenue declined 4% year over year to $23.7 billion, and while non-GAAP earnings per share grew 10% from the year-ago quarter to $3.99, gross profit and operating income posted mid-single-digit declines. In other words, IBM's EPS growth was driven purely by nonoperating items. A number of headwinds are impeding IBM's growth. U.S. federal budget pressures, weak demand out of China, hardware commodification, and increasing competition among enterprise software vendors will continue to be issues in the fourth quarter and into 2014.
Grady Burkett does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.