Yahoo Finance 2018 Will Be IBM CEO Ginni Rometty's Year of Vindication
- By Sangara Narayanan
IBM (IBM) reported strong fourth quarter earnings, beating analyst estimates, and also raised its full year earnings guidance for 2017. IBM reported fourth quarter revenues of $21.77 billion with earnings of $5.01 per share, while the market was expecting $21.66 billion and earnings of $4.88 per share. Despite the beat, this was the 19th consecutive quarter of earnings decline for Big Blue.
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The intrinsic value of IBM
The good news for IBM investors was that the company's strategic imperatives, which includes forward-looking business lines such as Analytics, Cloud and Security, accounted for a little more than 40% of IBM's overall revenue in 2016. This growing part of the business has not yet reached a position where it can offset the losses the company is facing from its legacy lines. But if the segment continues on its current growth trajectory, that will change within the next eight quarters.
Revenue from the Analytics division reached $5.6 billion for the fourth quarter, with 2016 sales from this unit reaching $19.5 billion, a growth of 9% compared to the prior year. Cloud-as-a-service run rate reached $8.6 billion during the fourth quarter, a 63% growth compared to the prior period. Analytics and Cloud are the two superstars of IBM's strategic imperatives, and will continue to remain in the lead over the next several years.
2016 full-year revenues came in at $79.9 billion, with $32.8 billion coming from strategic imperatives and $47.1 billion from other business streams.
In 2015, IBM's total revenues were $81.741 billion. Since strategic imperatives grew by 13% this year, it must have recorded nearly $29 billion in sales last year, which means nearly $52.7 billion came from other business streams.
That means other business lines declined to $47.1 billion from $52.7 billion, a drop of 10.6%. We can now use these figures to extrapolate their earnings for fiscal 2017.
If IBM can repeat its current performance over the current fiscal, 13% growth in strategic imperatives and a 11% decline in the rest of its business, the former will hit $37.06 billion in sales, and $41.92 billion will be from other businesses, for a total of $78.98 billion.
That's still a billion dollars away from posting flat sales. Clearly, the gap between the growing parts and the declining parts is rapidly reducing. That means there is a very good chance that IBM will post flat sales growth within the next four to six quarters and then start showing positive, stable and growing numbers from that point on.
Sometime in 2018 seems to be when IBM will reach that point, unless it is able to accelerate growth in the two key segments, Analytics and Cloud.
Disclosure: I have no positions in the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of IBM
