IBM Shares Continue Slump After Weak Earnings Report

“We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry”, said by CEO Ginni Rometty.

The third quarter for IBM (International Business Machines) was a very disappointing one pushing the stock price sharply lower and having a big impact on the Dow Jones Industrial Average. IBM slipped more than 7% in pre-market trading after the company posted lower profit in the third quarter and is now trading at $162, down another 4% following their 7.11% loss in the previous day. Also, the confirmed speculation of IBM paying chip fabricator Global Foundries is going to take IBM’s own chip making operations off its hands.

The New York-based company reported quarterly earnings of $3.46 per share, missing consensus estimates by about 20% at $4.30 per share. This is a very unexpected disappointment as IBM has reported positive earnings beating estimates by an average of 1.08% since last September.

Third Quarter Statistics

·Net income from continuing operations: $3.5 billion, down 17 percent
·Consolidated results, including net loss on discontinued operations of $3.4 billion:
-Net income: $18 million
·Revenue from continuing operations: $22.4 billion, down 2 percent



“While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas — cloud, data and analytics, security, social and mobile - where we continue to shift our business. We will accelerate this transformation,” said Ginni Rometty, IBM chairman, president and chief executive officer.

Discontinued Operations

IBM had reached an agreement under which Global Foundries will acquire IBM’s Microelectronics OEM semiconductor business and manufacturing operations. The transaction with Global Foundries is expected to close in 2015. The results from continuing operations exclude the Microelectronics business, which is presented separately as discontinued operations.

Loss from discontinued operations: $3.3 billion, net of tax
Cash Consideration transferred to GLOBALFOUNDRIES: $1.5 billion, paid over the next three years
Operational net losses from Microelectronics business: $.01 billion

This remarkable, yet unsurprising move by IBM essentially divests themselves of the semiconductor business entirely and to leave the chip fabricating altogether. This move by IBM is unconventional because they are paying Global to take the business from IBM indicating the tough demand of surviving in the semi-conductor business.

The business has caused issues for IBM and has struggled to attract business to keep the division prosperous, as IBM’s power chip manufacturing volume isn’t enough to sustain the business on its own. By releasing themselves of their semiconductor manufacturing business, IBM is not only cutting a business that is losing them money, but it is also a necessary step to enable the consolidation of the manufacturing business.

Services

Global Services segment revenues decreased 3 percent to $13.7 billion
Global Technology Services segment revenues decreased 3 percent to $9.2 billion
Global Business Services segment revenues were down 2 percent to $4.5 billion

Company Stock Buybacks

During Q3, the company returned $2.8 billion to shareholders through $1.1 billion in dividends and $1.7 billion in share repurchases. The buybacks off set shares outstanding dropping it to 990 million on September 30 compared to 1.1 billion in Q3 last year.

At the end of September 2014, IBM had approximately $1.4 billion remaining from the current share repurchase authorization. The company expects to request an additional share repurchase authorization at the October 2014 board meeting.

Buying Opportunity

With IBM divesting their struggling division in the semi-conductor business, this allows them to concentrate on their core business and drive real growth for investors. With their future plan of stock buybacks, and high generation of FCF (as of 3Q: $9.6 billion cash on hand and generated $2.2 billion), this gives promising growth for investors in the long run. This may be a good opportunity for investors to buy this blue chip DJIA stock for a minor discount.

Bottom Line

We currently rank IBM as a Zacks Rank #3 (hold), though there has been recent downgrades in earnings estimates. As IBM seeks to align their business in the right direction and taking a minor hit to their market value, long term growth is what the CEO has in mind.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on IBM


Zacks Investment Research