IBM's 'New Normal' of Mediocrity

NEW YORK (TheStreet) -- "Quicksand" was the best way I could describe IBM's (IBM) recent revenue performance, which has been in a perpetual decline over the past couple of years. This is even though the company has spent well over $16 billion in acquisitions trying to escape its predicament. It hasn't worked.

Now the stock is trading right around $175, after a 6% decline on Thursday, following yet another earnings disappointment; IBM investors can only wish the value erosion was as slow as quicksand. However, as I said on Tuesday, this shouldn't have come as a surprise.

First, there's never been any evidence from IBM's management that it can effectively respond to Oracle ( ORCL) in the enterprise or Salesforce.com ( CRM) in the cloud.

Secondly, look at the degree to which rivals like Accenture ( ACN) and Tibco ( TIBX) have won significant deals at the expense of IBM. The company is now getting attacked from all sides. Last but not least, there are now reports that the Central Intelligence Agency has bypassed IBM's cloud services in favor of Amazon ( AMZN).

In response to these threats, IBM's management has maintained the standard "corporate speak," saying (among other things) "we're going after higher margin businesses." While this might be true, this strategy has come at the expense of higher revenue and market share. Not to mention investor confidence.

On Wednesday, these blunders came home to roost.

Here's the good news first: Both earnings-per-share and net income were up 11% and 6%, respectively. IBM earned $3.68 per share on net income of $4 billion, which was good enough for a 3-cent beat. This isn't much of a surprise. Profits, which have been plentiful (in part) due to significant cost controls, have been the main driver of the stock.

In an effort to streamline costs and achieve its goal to deliver $20 in earnings per share by 2015, the company has been firing workers, while also shutting down portions of its hardware business that's been underperforming. To that end, management's profitability goals remain on track. For instance, while IBM did post a $350 million decline in gross profit, that the company was able to expand gross margin from 47.4% to 48% is nonetheless impressive.

There's been no easy solution, however, for the struggles in revenue, which has been on a continuous decline. In this quarter, revenue was down again by 4%, missing Street estimates, which called for a flat performance. In that regard, the company's CEO Ginni Rometty said:

"In the third quarter we continued to expand operating margins and increased earnings per share, but fell short on revenue. Where we had identified high-growth opportunities and pursued them aggressively -- Cloud, mobile, business analytics and security -- we continued to show strong growth."

Among the biggest disappointments was the company's systems and technology segment, which posted 16% year-over-year revenue decline. More glaring, IBM's services division, which is the company's largest segment, declined by more than 4%, which supports my belief that Accenture, and to a lesser extent, Infosys ( INFY), have begun to steal market share.

While Rometty did talk about "taking action to improve execution in our growth markets," the continued lack of execution and traction is disappointing, given that IBM has now averaged 3% revenue declines over the past five quarters.

Wall Street, meanwhile, which has always had a love affair with IBM on the basis of its strong cash flow and decent return on equity, is finally waking up to IBM's new reality. The company is now just another bellwether with a strong name that's become grossly overrated.

In my article on Tuesday, which predicted exactly what the company just revealed, I closed with: "Should the stock fall to, say, $175 or lower, growth or no growth, I'd have to reconsider." As of Friday morning, the stock is hovering right around $175. Given the company's strong yield and what is still a highly profitable business, I continue to believe this pullback has brought IBM to its fair value.

Not to mention, the Street will continue to give the company the benefit of the doubt as long as it remains on its trajectory of achieving $20 in earnings per share by 2015. While I don't see this as a meaningful accomplishment in the face of declining revenue, there's no point fighting the tide here.

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 StockSaints.com 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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