IBM

  • IBM the global IT business, reported   disappointing results for the first quarter of 2020, with revenues declining   by 3.4% to $ 17.57 billion.

  • There is a substantial   degree of earnings see-through, following the Red Hat cloud acquisition, with   currency volatility and corporate action, making it difficult to unpack the   results.

  • However the future   prospects of the company depends on its ability to synergize the Red Hat   global cloud operations, and turn them around under the new management.

  • Recurring income in this   area is a strength of this operation, with the new CEO, reporting a recurring   revenue contribution of 60% from the cloud operations. The client base is   focused on global Healthcare, telekom’s and the public service sectors, which   appear to be relatively resilient in the current challenging economic   environment.

  • Group results were also   impacted, by the downturn in the software business segment, with enterprise   customers delaying new business spend to focus on areas requiring more   urgency.

  • Prior to the pandemic   the group had free cash flow estimates of $12.5 billion, forecasting $1   billion growth from the Red Hat acquisition by the end of 2020.

  • IBM is undergoing a   major transformation, from the days of the Big Blue, as it was known, being   the bluest of blue chip companies, focused on a hardware, software, and   servicing to a global corporate client base.

  • It has come too late to   the party, facing strong competitors, such as Microsoft and Amazon , however   the new higher margin operation will need to gather momentum, whilst a strong   client base and global footprint should be a positive once the pandemic comes   under control and revenue headwinds disappear next year.

  • The dividend yield of   5.5%, is attractive and the new management believes that the current level can   be maintained, despite the fact that like a host of corporates, IBM has   withdrawn 2020 profit guidance. The share price has been trading in a range   of $119.50 with the current price of $123.00 reflecting that the quarterly   dividend of $1.62 can be maintained. On a PE of 12.2x, it remains an   attractive investment.

IBM