IBM reported EPS of $2.70, up from $2.61 reported in the prior quarter. However, analysts were expecting EPS of $3.05, so, the earnings disappointed many. IBM’s Senior Vice President attributed the weak earnings to two main causes: The inability to close some profitable deals prior to the end of the fiscal quarter, and a weaker Japanese yen.
With regards to the inability to close deals before the deadline, the argument is valid (as the deals are worth around $400 million), but certainly does not explain why the company’s revenue was so weak: The gap between the estimated revenue and the reported revenue is almost $1.5 billion. This is not something that can be attributed to missing a deadline for deals worth only $400 million.
The losses attributed to the Yen’s drastic depreciation this year are legitimate, and relatively hard to hedge as most of Japan’s revenue comes from service operations, and are therefore conducted in Yen. The company was far from weak in Japan, however, as it actually experienced higher revenue growth in Japan than in the Asia/Pacific region as a whole.
Other causes probably played a role in the weak earnings: Lowered government demand due to budget cuts in both the U.S. and Europe, product transitions and shifts in technology, and general macroeconomic concerns weighed down demand for products.
That being said, the company also reported healthy margin gains and a drop in total expenses, as well as a slight growth in cash. This has been a pattern for the company for the last few quarters, and is an encouraging sign that points to a rise in productivity and a more favorable revenue mix.
The company also reported a rise in its order backlog, which, coupled with the $400 million in deals, a possible slowdown of the Yen’s drop, and better worldwide economic conditions, could bring better earnings next quarter. The company has actually kept its 2013 outlook unchanged. Current analyst earning consensus for this year is at $16.74/share.
Bottom line
It is understandable that the weak earnings disappointed many investors. However, IBM remains one of the strongest tech companies out there. The recent stock price plunge has driven valuation ratios down, so these price levels could be good entry points for value investors who believe that the company’s weaker-than-expected results were part of an off-quarter, rather than a sign that International Business Machines Corp. (NYSE:IBM) has reached a point of declining growth and earnings.
The article After Post-Earnings Plunge, Is This Stock an Opportunity? originally appeared on Fool.com.
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