Some IBM news that reflects interesting trend comparison to CPQ. IBM is a major factor to be reckoned with, despite all the talk against them. They may well be big, slow, and overpriced, but look how quickly they were able to focus in the sub-zero sector!
K.
IBM: DEFENDING PRE-TAX PROFIT GROWTH WE FOUND TODAY'S JOURNAL ARTICLE ONE-SIDED
11:41am EST 11-Dec-97 Prudential Securities (D.YOUNG)
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Ind. Div.: $0.20 Yield: 0.7% Shares: 978 mil. 52-Wk.Range: 113-63
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 12/95 $ 5.51 20.1X $ 1.11 $ 1.48 $ 1.15 $ 1.83
Actual 12/96 $ 5.53 20.1X $ 1.11 $ 1.26 $ 1.22 $ 1.96
Current 12/97 $ 6.33E 16.8X $ 1.18A $ 1.46A $ 1.38A $ 2.34E
Current 12/98 $ 7.20E 14.8X
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* We found nothing new in today's Wall Street Journal article about the quality
of IBM's earnings. We believe some important facts were overlooked.
* For the first three months of 1997, IBM absorbed $0.34 per share in currency
hits. For the full year, we expect this amount to reach $0.50-$0.55. Taking
this into account, earnings growth looks much stronger than it first appears.
* Another important operating factor that was not mentioned is restructuring
charges and how IBM changed its treatment of them. This year, IBM will take an
estimated $700 million in restructuring charges, about the same amount taken in
1996. The difference is that in 1996, IBM broke-out restructuring charges from
its other SG&A expense. In 1997, the company is not breaking it out, leaving it
an undefined part of operating expense. Excluding approximately $700 million
in restructuring operating expenses in 1997 - we calculate IBM's EPS would be
around $6.78/share versus our $6.33/share estimate.
* Overall, we see good growth on a constant currency basis. There is a clear
change in IBM's operating model. We expect 8%-10% top line growth and like
growth at the pre-tax income level, thanks to expense management initiatives.
We anticipate 15%+ sustainable EPS growth, backed by ongoing share repurchases
and tax rate management.
* IBM has transformed itself from a volatile GDP play to a more consistent
recurring earnings producer. Compared to the market's largest industrials which
are less profitable and growing more slowly, we believe IBM is undervalued by
50-65%. Compared to service and software peers we believe IBM is undervalued by
65%. Disaggregating IBM and comparing valuations unit by unit, we believe IBM
is undervalued by 50% - our analysis indicates potential upside to $165/share.
With the potential for sustainable EPS growth of 15%, fortified by less
volatility and improved visibility, we think IBM is positioned to improve its
valuation. |
