* Reports Q2 2019 results on Wednesday, July 17, after market closure
* Revenue Expectation: $ 19.18 billion
* EPS Expected: $ 3.08
The way for IBM (NYSE 🙂 is not an easy way. After seeing a consistent decline in sales, investors are now looking for signs that the recent mega acquisition of Red Hat will soon start to pay off and will help growth to recover.
IBM has been struggling for years to achieve growth with its traditional engines, such as the sale of equipment and IT services. In an era when Amazon (NASDAQ 🙂 and Alphabet & # 39; s Google (NASDAQ 🙂 have invented new ways to provide infrastructure support to large companies, Big Blue has failed to capture a significant proportion of these new markets, such as cloud computing and artificial intelligence.
Turnover grew by only 1% in 2018, refusing a six-year decline. For the quarter ended June 30, analysts expect the company to fall by more than 4% in sales to $ 19.18 billion. And for the current fiscal year, they predict sales will drop to $ 77.8 billion – the lowest since the late 1990s.
The shares of this tech giant, who dominated the first decades of computers with inventions such as the mainframe and later the floppy disk, have risen sharply in recent months, ending yesterday's session at $ 143.30 – more than 25% this year . But in the last five years they have lost 25%, massively worse than the technology heavy (+ 85%).
Red Hat Deal: A Game Changer?
With the recent rebound in shares, investors may be concerned that the rally has gone ahead and the shares are therefore risky. That may be true in the short term, but we are more convinced that the company is on the right track to realize its long-term reversal plan.
The pivot of CEO Ginni Rometty's strategy was to halt a slowdown in sales by conquering a larger proportion of new growth areas in the digital economy. That goal remained a distant dream until last year, because the company's attempts to grow organically were unable to produce results and satisfy investors.
But that will not be the case in the future. In our opinion, the $ 34 billion purchase of Red Hat (NYSE: RHT) by IBM, completed this month, will prove to be a game changer. This acquisition adds a relatively high margin software activity to IBM & # 39; s stable offering, particularly as regards delivering hybrid cloud services to business customers.
Approximately 85% of all companies are expected to adopt a hybrid cloud approach with most using a mix of public cloud services such as Amazon Web Services alongside their own private cloud networks, according to a Jefferies & Co. forecast.
Cloud revenues accounted for a quarter of IBM's total revenues in the last 12 months to the end of April, up from 22% a year earlier. And there is a good possibility that the company will succeed in accelerating that momentum after the acquisition of Red Hat.
For long-term investors pursuing a steady income stream, ownership of IBM shares makes much sense. The company plans to return to shareholders approximately 70% to 80% of the free cash flow each year, with annual dividend increases and ongoing share buy-backs.
IBM shares remain an attractive turnaround bet suitable for long-term investors with a time horizon of 5-10 years. Despite the recent rally, the stock still yields 4.54%, doubling the average yield of 2%. The company has increased its dividend five times in the last five years and will join the list of so-called Dividend Aristocrats in 2020, companies that have increased their dividend in 25 consecutive years.
Bottom Line
We believe that the upside potential remains strong if IBM shows a sustained turnaround and can demonstrate that the Red Hat acquisition was worth spending the largest amount the technology giant has ever paid for an acquisition in its 108- year history. The growth of IBM in its cloud computing activities is a bright spot, especially when the company is well positioned to win over competitors.
