IBM's Third Quarter Results

IBM (IMB) is one of Warren Buffett's largest holdings, and a company that I have written about before. The company sells for less than 10x its operating earnings and 10x its 10 year average operating earnings. This discount from its underlining economic earnings and market price is quite clear. IBM's shares fell an after hour trading after reporting its third quarter earnings. The sell off in IBM has enlarged the discount between underlining value of the business and market price.

The company reported sharply lower sales and profits that resulted in shares falling to $140/share. Currently IBM shares are selling at a 5-years low, and Buffett is sitting on a another $600 million paper loss for IBM.
The company is blaming its decline in sales and profits on the stronger dollar and the sale of one of its hardware businesses last year. IBM's lower sales and profits raises new questions from investors and the market on how their transition into new business is going. I believe these fears are overblown. The company is highly profitable and selling for less than 10x its current earnings of $15.01/share. I agree with Buffett who said that in 5 to 10 years IBM will be earning more than its earnings today.

During the third quarter IBM saw net profits fall 14% to $3.0 billion dollars, and the company's operating earnings fell 9% to $3.34/share as well. Operating earnings came in slightly above Wall Street Analyst estimates. The company shaw there revenues fall 14% from last year to $19.3 billion. IBM revenues came below analyst estimates of $19.6 billion. The company missed on revenues and slightly exceeded analyst estimates for operating earnings. IBM lowered its earnings forecast for the rest of the year to $14.75 to $15.75 a share from its previous projections of $15.75 to $16.50 a share.

The bulk of the company's business is overseas, and the strengthening of the dollar was responsible for about 9% of the decline in revenues in the third quarter. To offset the decline in its traditional hardware business, IBM has been investing heavily in new areas that are growing rapidly. The company's heavy investments in data analytics, Watson artificial-intelligence software, cloud computing, mobile applications and security. All of these growth businesses produced $25 billion dollars in revenues, or 17% of sales for IBM last year. The company's strategic initiatives so far this year has grown at 27%.

Based on the company's current forecast of 14.75 to $15.75/share for the year their selling for 9x and 8x its forecasted 2015 earnings. I believe that at its current price of $140/share, IBM is a great long-term investment. The company's growth business units are expect by 2018 to produce $40 billion in annual revenues for the company. IBM is playing the long game and the CEO has made its clear that the company will continue with its current plans. The company over the last 10 years has average operating earnings of $16.44 billion dollars, or $16.20/share. Currently the company is selling for 8x its 10-year average operating earnings. The company should be selling for at least 10x its 10-year average operating earning. IBM at 10x its 10-year average operating earnings would sell for $162.00/share. This is over $20 higher than its current market price.
Published on Oct 30, 2015
By Cody Eustice
Cody is a freelance writer who has been writing financial articles for various sites for over a year now. He is a value investor looking for companies that sell for far less than their estimated business value.

Copyrighted 2020. Content published with author's permission.

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