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IBM’s Sales Slump Turns Stock Into Dow’s Lone Loser of 2013

Photographer: Scott Eells/Bloomberg

Traders at the New York Stock Exchange in New York, on Oct. 17, 2013. Investors assessed the effects of IBM on the market. Close

Traders at the New York Stock Exchange in New York, on Oct. 17, 2013. Investors... Read More

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Photographer: Scott Eells/Bloomberg

Traders at the New York Stock Exchange in New York, on Oct. 17, 2013. Investors assessed the effects of IBM on the market.

International Business Machines Corp. (IBM), the world’s largest provider of computing services, hasn’t convinced investors that it can pull out of a sales slump, sending the stock to its first annual decline since the financial crisis in 2008.

Even as the company boosted its dividend and added about $20 billion to its buyback plan, the stock became the only loser in the Dow Jones Industrial Average (INDU) this year. The shares dropped 2.1 percent this year, compared with a 26 percent gain for the index.

Revenue has fallen for six straight quarters, dragged down by sluggish demand for computer hardware. That’s forced Chief Executive Officer Ginni Rometty to rely on job cuts, tax gains and asset sales to keep increasing earnings per share. Technology investors would prefer a company that’s growing, said Todd Lowenstein, a portfolio manager at HighMark Capital Management Inc.

“We don’t think investors are going to be paying up for financially engineered EPS,” said Lowenstein, who helps oversee $17 billion in assets. He no longer holds IBM shares. “In tech, most people want to see top-line growth, and IBM is just not part of that trend. IBM is part of the cluster of old tech companies considered dinosaurs of yesteryear.”

The technology giant, based in Armonk, New York, is coping with an industrywide transition into the cloud era, where information is stored online instead of onsite. While IBM is getting an increasing amount of revenue from cloud services, the shift has spawned a new crop of competitors and eroded demand for traditional hardware and services.

On Target

Still, the company remains on target to reach $20 in adjusted earnings per share in 2015, up from $15.25 last year. Cost reductions and a shift into more profitable businesses have helped maintain the growth.

Michael Fay, an IBM spokesman, declined to comment on the stock trading.

The company embarked on a restructuring program this year, cutting jobs globally. More than 3,300 workers were dismissed in the U.S. and Canada alone, according to Alliance@IBM, an employee group. Some U.S. contract workers also were ordered to lessen their hours, according to a memo obtained by Bloomberg.

In the third quarter, a more favorable tax rate contributed 30 cents a share to earnings, said David Grossman, an analyst with Stifel Nicolaus & Co., in a note at the time. That helped the company boost earnings to $3.99 a share, excluding some items -- 3 cents more than the average of estimates compiled by Bloomberg.

Increasingly Concerned

Even as earnings per share grew, the stock continued to fall, signaling that investors were increasingly concerned that IBM’s strategy was failing to produce growth, said Kulbinder Garcha, an analyst at Credit Suisse Group AG.

“It’s now coming to a point where they are almost doing everything they can to get to that earnings number,” Garcha said. He downgraded IBM’s stock to the equivalent of a sell rating this year. “They need to start thinking about some serious reinvestments and repositioning the company.”

Half of the analysts who covered IBM recommended buying it at the beginning of this year, according to data compiled by Bloomberg. That has fallen to less than a third today.

Rometty has identified the nascent cloud industry as one of IBM’s biggest growth opportunities. In her biggest acquisition since taking over as CEO at the beginning of 2012, IBM bought cloud-computing storage company SoftLayer Technologies Inc. this year -- paying about $2 billion.

Cloud Opportunity

IBM reported more than $1 billion in sales from cloud services last quarter, the first time it has disclosed revenue from that segment. That wasn’t enough to keep total sales from falling for a sixth straight quarter, sending the stock sliding in October to a two-year low. IBM responded with another share buyback increase, adding $15 billion to the program.

Competitors, meanwhile, have been building their own cloud offerings. Oracle Corp. has spent about $50 billion to acquire roughly 100 companies over the past decade, helping it adjust to the changing industry. Amazon.com Inc. (AMZN), which Gartner Inc. sees as the cloud leader, defeated IBM for a $600 million government cloud-computing contract this year.

Oracle shares have gained 15 percent this year, while Amazon’s stock has surged 59 percent.

Losing Weight

IBM was ousted from the top spot in the price-weighted Dow in September, when the index underwent its biggest reshuffling in almost a decade. The benchmark added Goldman Sachs Group Inc., Nike Inc. and Visa Inc. -- in part to reduce IBM’s influence, according to David Blitzer, chairman of the S&P Dow Jones index committee. The move means the Dow will be less susceptible to share price swings in IBM.

The Dow’s changes had little effect on IBM shares, which had already begun their 2013 decline before the rebalancing, having fallen 2.6 percent at the time.

The company’s shares rose less than 1 percent to $187.57 today at the close in New York.

IBM still counts some big supporters in its corner, including billionaire Warren Buffett, whose investment company Berkshire Hathaway Inc. was IBM’s biggest shareholder as of September. The company’s price-to-earnings ratio hit a four-year low of 11 earlier this month and is now at 12, a discount to the Dow’s 16. The Standard & Poor’s 500 Information Technology Index, an industry benchmark, trades even higher at about 18.

“They will have record per-share earnings this year,” Buffett said in an interview on the “Charlie Rose” show on PBS in October. “That can be disappointing if you expected more. But it is not a bad record, believe me.”

IBM may also gain ground in the cloud-computing business, which is still in its early stages, said Joe Foresi, an analyst at Janney Montgomery Scott LLC who has a neutral rating on the shares. The challenge is to keep up with the changing technology industry while maintaining the earnings trajectory investors have come to expect, he said.

“IBM has to show that they can grow,” he said.

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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