Thursday, July 16, 2009

IBM beats big, raises full-year guidance (IBM)

AlphaNinja - IBM is trading up 1.8% after hours on a great earnings report.

The company reported q2 earnings of $2.32 versus street expectations of $2.02, although revenue came in just under the $23.6billion expectation. We're going to see more and more of these "jobless recoveries" in earnings beats -->>not necessarily job cuts, but earnings will be coming from tightening budgets as opposed to big revenue surprises.

IBM takes full year 2009 guidance to $9.70per share from $9.20. Also, the company says it is ahead of its 2010 "roadmap" that calls for earnings of $10-11 per share.

If the company earns $12 per share (whether in 2010, 2011, 2012) we're talking about a PE-ratio of 9.3 for one of the most reliable earners on the planet. I'm not generally a PE-ratio investor, but the market WILL bid this up, even if we have to wait for "back-to school" stock market volumes to return.

Details from the company's release:
-->>Diluted earnings of $2.32 per share, up 18 percent;
-->>Raises full-year 2009 EPS expectations to at least $9.70 from $9.20;
-->>Free cash flow of $3.4 billion; cash balance of $12.5 billion;

"As a result of our strategic transformation, we have a very strong business model that is delivering superior earnings, cash and client value," said Samuel J. Palmisano, IBM chairman, president and chief executive officer.

"We have continued our strategic investments in Smarter Planet solutions, business analytics and next generation data centers. As a result we are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers. We are well ahead of pace for our 2010 roadmap of $10 to $11 per share."

If IBM hits $12.00 per share in earnings, then Free Cash Flow could come in around $18billion. Subtracting the company's $12billion in net cash from its market value, that's a FCFY (free cash flow yield) of 14%. IBM borrows money for (significantly) less than half that amount!

A 14% (or 12% if one uses more conservative estimates) FCFY for an earnings stream as reliable as this below is simply too rich -->> the yield will drop and the stock will rise, and so will the DJIA (maybe not in a straight line!), as IBM is almost 10% of the index.

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