IBM's Selling Off After Earnings. But There's Still a Logical Way to Trade It
Let's chart this iconic tech name that just posted quarterly earnings and see how to play it.
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On Wednesday afternoon, International Business Machines IBM, affectionately known as "Big Blue," revealed first-quarter financial results that were solid ... but not so spectacular. For the three-month period ended March 31, IBM posted an adjusted earnings per share of $1.60 (unadjusted EPS: $1.12) on revenue of $14.541 billion. These numbers all beat Wall Street's expectations, while year-over-year revenue growth inched 0.6% higher. That said, the stock is trading lower on Thursday morning. Let's talk about this.
Operations
As revenue increased slightly year over year to $14.541 billion, the cost of sales contracted, leaving a gross profit of $8.031 billion (+3.7%). This came on a company-wide gross margin of 55.2%, up from the year-ago comparison of 53.5%. Operating expenses increased 3.1% to $6.873 billion, leaving operating income of $1.158 billion (+7.8%). That puts operating margin at 8%, up from 7.4%. Here's where things start to get tricky.
Accounting for interest, taxes and other income and expenses (especially taxes), unadjusted net income dropped 34.3% to $1.054 billion. That works out to a fully diluted EPS of $1.12 vs. $1.72 for the year-ago comp. On an adjusted basis, income from continuing operations dropped 3% to $1.517 billion, while adjusted diluted EPS dropped from $1.68 a year ago to $1.60. The lion's share of the adjustments made were acquisition connected and involved taxes related to that.
Segment Performance
- Software generated revenue of $6.3 billion (+7%, +9% ex-FX), producing a gross profit margin of 83.6%, up from 82.4%.
- Hybrid Cloud (Red Hat)-driven revenue was up 12%, up 13% ex-FX).
- Automation-driven revenue was up 14%, up 15% ex-FX).
- Data-driven revenue was up 5%, up 7% ex-FX).
- Transaction Processing-driven revenue was flat, up 2% ex-FX).
- Consulting-generated revenue of $5.1 billion (-2%, flat ex-FX), produced a gross profit margin of 27.3%, up from 25.3%.
- Strategy and Technology-driven revenue was down 3%, down 1% ex-FX).
- Intelligent Operations driven revenue was down 2%, flat ex-FX).
- Infrastructure generated revenue of $2.9B (-6%, -4% ex-FX), producing a gross profit of 52.8%, down from 54.2%.
- Hybrid Infrastructure driven revenue was down 9%, down 7% ex-FX).
- Infrastructure Support driven revenue was down 3%, flat ex-FX).
Fundamentals
For the period reported, IBM generated operating cash flow of $4.37 billion. Out of that came net capital spending of $321 million and a $2.087 billion change in IBM financing receivables. This left free cash flow of $1.962 billion. Out of that free cash, it paid out $1.549 billion in cash dividends to shareholders.
Moving on to the balance sheet, IBM ended Q! with a cash position of $17.591 billion and inventories of $1.431 billion. Current assets ended the quarter at $35.336 billion. Current liabilities add up to $35.106 billion, including short-term debt of $6.913 billion and deferred income of $15.057 billion (not a true financial obligation).
That puts the current and quick ratios at 1.01 and 0.97. Not very impressive. But once we adjust these ratios for those deferred income, they rise respectively to 1.76 and 1.69. Now, that's far more palatable.
Total assets amount to $145.667 billion. But goodwill and other intangibles make up $78.457 billion of that. At 53.9% of total assets, that's awfully high and somewhat discomforting. Total liabilities less equity comes to $118.714 billion. This includes long-term debt of $56.371 billion. That is a lot and combined with the short-term debt, dwarfs the cash position. IBM can meet its obligations.
On that, there is no doubt. Understand, though, that growing the debt load is not an endless resource and this number will have to be watched. Over the past 12 months, IBM's short-term debt is up 35.8% while the long-term debt is up 13%.
Guidance
During the call, IBM maintained the full-year guidance for revenue growth of 5%+ and for free cash flow of about $13.5 billion. But during that call, CFO James Kavanaugh said this: "While we feel good about the core growth drivers of our business, there are areas of our portfolio that could see greater variability in the event that the macroeconomic environment deteriorates. This includes Consulting, which is more sensitive to discretionary pullbacks and DOGE-related initiatives, consumption-based services and software, including in Red Hat, and areas of Distributed Infrastructure." That may be at least part of what's hurting the share price on Thursday morning.
My Thoughts
Growth is not really what one invests in IBM for. Free cash flow is. That and the dividend of $6.68 per year, which works out to a yield of about 2.75%. I'm not all that impressed overall. I would like to see some of that cash flow put toward the reduction of what could be a burdensome debt-load if not focused on soon.
Readers will see that IBM completed a Triple Top pattern of bearish reversal in March that resulted in a sell-off that bottomed in early April. The stock has not put together any discernible pattern since, but went from testing its 50-day simple moving average from below on Wednesday to testing its 200-day simple moving average from above on Thursday morning. Both of these lines have held so far.
That could mean that IBM investors may see a trading range in coming days that spans from $223 or so up to $247-ish. That's a traders' market and the 21-day exponential moving average smack-dab in the middle of it. You can see how the swing crowd hung onto that level for several days going into earnings.
Personally, I think IBM is investable, but not in size should the stock try that 200-day line again this afternoon. Just remember the 8% panic rule should that line crack after the fact.
At the time of publication, Guilfoyle had no position in any security mentioned.
