I expect that a slowing Chinese economy will take a cut out of
earnings this quarter-and next and next-at commodity producers, at
luxury goods retailers, and at fast food operations such as
)? That IBM blamed its weak second quarter on slowing sales to
China (and the other BRIC economies of Brazil, Russia, and India)
shows how pivotal emerging markets have become to growth at
US-based multinationals, and why even a modest slowdown in growth
in those economies is a big deal.
After the close of New York markets on July 17, IBM reported second
quarter earnings of $3.91 per share (excluding a $1 billion charge
for "rebalancing" its workforce that Wall Street called a
non-recurring item even though this has become business as usual at
IBM.) That was above the $3.78 a share projected by Wall Street.
Revenue fell by 3.3% year over year to $24.92 billion, below the
$25.3 billion analysts had projected.
A big part of the revenue problem for the quarter was that IBM's
growth markets in the emerging economies didn't show much growth.
Revenue from the BRIC countries was flat year over year (or up 1%
in constant currencies) That certainly didn't make up for the 3%
decline in North American revenue or flat revenue from the
company's Europe/Middle Eat/Africa sales region.
The quarter illustrates that IBM has an ongoing problem with
earnings growth. IBM continues to generate hefty cash flows-$16.95
a share in 2012-but with revenue showing very little growth, much
of the company's earnings growth is coming from cost cutting (that
workforce "rebalancing") and share repurchases. Credit Suisse
calculates that cost cutting, improvements in product mix that
increase margins, and share purchases have accounted for 50% of
growth in earnings per share in recent quarters.
IBM did raise its forecast for 2013 non-GAAP earnings per share to
$16.86 for 2013 from $16.55. But I think investors would be advised
to focus on the recent quality of IBM's earnings and earnings
growth and ask what multiple they want to pay for the company's
growth. The stock currently trades at 13.2 times trailing 12-month
earnings. Standard & Poor's calculates a 12-month target price
for these shares of $227. That would be a 14.5% gain from the 2:30
pm New York time price on July 18 of $198.17.
I would note, however, that S&P gets to that price by assuming
that the multiple that investors will pay for IBM's earnings and
growth will increase to 13.6 from the current 13.2.
I find that assumption questionable unless you're willing to assume
that the multiple for the entire US market continues to climb over
the next 12 months on a belief in faster economic and earnings
Editor's Note: This article was written by Jim Jubak of
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