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IBM's Still Stuck in Quicksand

When you consider that IBM has averaged 3% revenue declines over the past four quarters, the extent to which the company has been given a pass has been remarkable. It's as if no one dares to get critical. This is even though IBM's profits have also shown an average of 3% year-over-year declines over the past four quarters, including a 15% decline in the July quarter, caused (in part) by a 2.5% decline in margins.

This is where IBM bulls are often quick to remind me that, even with the profit decline, the company still managed to beat earnings by 13 cents. While this may be true, let's not be too quick to dismiss the fact that 12 cents out of the 13-cent beat was due to a favorable tax rate. The numbers are not often as they seem.
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On Wednesday, though, management must "beat" more convincingly. It can start by showing better growth in its services business, which posted 4% decline in the July quarter. Given that the service unit is IBM's largest segment, this is a concern. And given that the 4% decline in the July quarter followed a 4% and 2% decline in April and January quarters, respectively, leads me to believe that rivals like Accenture (ACN) and Infosys (INFY) have begun to steal market share.

Even with the uninspiring growth situation, there are still plenty of positives with IBM. For instance, there are very few companies that can compare to IBM when in terms of cash flow and return on equity. Not to mention, IBM still pays one of the best yields on the market. My problem has been the lack of growth, which has now coincided with decreasing profits.

What's more, given what is still a weak enterprise-spending environment, I don't expect much (if any) improvement in IBM's near term results, making the stock very unattractive. This is despite shares being now at what I believe to be fair value territory. But should the stock fall to, say, $175 per share or lower, growth or no growth, I'd have to reconsider.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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