IBM’s Revised Fair Value To $215 As New Initiatives Start To Pay Off
Analytics, Smarter Planet, IBM cloud and other new initiatives have carried International Business Machines, (NYSE:IBM) for the past few quarters amid a slowing European economy, and this continued in Q4 2012 as well. The company reported a double-digit growth in its earnings per share for 2012, despite shrinking revenue driven by software and new initiatives. The company reported a GAAP EPS of $14.37 for 2012, which is up for the 10th consecutive year. Net income was $16.6 billion for 2012, up 5% y-o-y even as revenues declined by 2% at $104.5 billion. [1]
The company’s focus on cloud computing and analytics is already paying off as these divisions have witnessed the highest revenue growth in Q4. IBM has also teamed up with AT&T to offer an integrated, end-to-end solution that provides access to cloud computing infrastructure over a secure private line provided by AT&T. This service simplifies access to the cloud and will provide IBM’s back-end services over a secure telecom connection provided by AT&T. Cloud revenue grew 80% y-o-y
We expect Big Data analytics and cloud computing services will continue to drive revenue growth in 2013 as the company expects a 10% jump in EPS to at least $15.53 and operating (non-GAAP) EPS of at least $16.70.
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Growth Economies And New Initiatives Carry IBM
The Americas’ full-year revenues were $44.6 billion, a decrease of 1% y-o-y while revenues from the EMEA region (Europe/Middle East/Africa) were $31.8 billion, a decrease of 6% y-o-y. Asia-Pacific revenues grew 3% y-o-y to $25.9 billion. Revenues in the BRIC countries — Brazil, Russia, India and China — expanded 7% percent. For 2012, Business Analytics revenue was up 13% while Smarter Planet Revenue was up more than 25% and cloud revenue jumped nearly 80%. These are high growth and high margin businesses which explains the jump in IBMs EPS despite lower y-o-y revenues.
Changes To Our Model
IBM’s revenues and costs both declined by about 2% in 2012. Global Technology Services revenue fell by nearly 2% to $40.2 billion while Global Business Services revenue fell by 4% to $18.6 billion. Software revenues grew by 2% to $25.5 billion.
The biggest drop was seen in Systems revenue which fell by 7% to $17.6 billion. We have reflected these numbers in our model, which was earlier showing slight growth in most divisions and a growth larger than 2% for Software. IBM has also taken on more debt in Q4, growing from $29 billion to its current level of $33.5 billion, and this has been reflected in our model from nearly $16 per share to nearly $20.
We currently have a $215 Trefis price estimate for IBM which is about 5% higher than the current market price.
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Notes:- IBM Q4 2012, www.sec.gov, Jan 22 [↩]