By Chris Bulkey, principal analyst at Technology Research Group
reported first-quarter earnings of $1.97 a share on revenue of $22.9 billion. On an as-reported basis, top-line growth was more than 5%. But on a constant currency basis sales were flat, seemingly putting forward revenue expectations at risk.
Profit growth came in at 17% as reported. Normalizing research and defense expense reduction (as a percentage of revenue), elevated interestincome, reduced interest expense, and tax rate, drags net income down to $1.64 ashare on a sustainable operating basis, or down 4% year over year.
Tax deferrals won't be known until the 10-Q is filed, but we note that corresponding balance sheet line items moved lower on a sequential basis, so we are assuming some degree of utilization.
IBM generated an impressive return on equity of 47% as reported. Removing dilution from accumulated comprehensive loss (i.e., dirty surplus) and normalizing R&D expense, net interest income, and tax rate pulls return on equity down to 21.5%. Accounting for dividend payout results in a sustainable growth rate of just below 17%.
Cash flow was another area of concern. Cash generated from operations increased 1.2% year over year, down sharply from 10.4% growth for full-year 2009 and loosely correlated with net income. Cash flow is roughly two times greater than net income in absolute terms, thus making gains harder to come by. Normalizing the disparity, however, still yields an unfavorable correlation.
IBM shares are up 1% year to date and valued at 13 times trailing earnings. Competitors
, trade at 16 times and 17 times, respectively.
All three companies have varying degrees of operating concerns. Each maylook like a value at current levels given brand-name recognition and bellwether status.We would disagree and simply don't see a catalyst for multiple expansion on thehorizon.
As a result, we reiterate a sell rating and $122 price objective on IBM (the target multiple remains 11 times 2010 EPS estimate).