IBM Investors Ask Palmisano `What's Next Mr. Wizard'?
As International Business Machines Corp. meets with investors in New York today, some shareholders want the world’s largest computer-services provider to go beyond profit goals and pledge itself to more specific sales growth.
Chief Executive Officer Sam Palmisano used the shareholder briefing three years ago to establish a target of $10 in earnings per share by 2010, a goal he has already reached. Some investors expect him to set a similar benchmark this year, and they want him to lay out specific plans for boosting sales at more than the current low-single digit rate.
“I want to see revenue growth,” said Peter Sorrentino, a Cincinnati-based portfolio manager at Huntington Asset Management, who helps manage $13.3 billion, including more than $100 million of IBM shares. “Sam Palmisano has come through the storm, but where do we go from here? What’s next, Mr. Wizard?”
Though investors give IBM credit for reaching the $10-a- share profit mark a year early, many have sold shares, saying profit growth may suffer without higher revenue gains. IBM’s sales have been little changed in the past five years, while sales at rival Hewlett-Packard Co. have risen more than 7 percent annually on average, in part because of acquisitions. IBM’s earnings per share have been bolstered by stock buybacks and jobs cuts, which some investors say may not be sustainable.
“They managed through a severe financial crisis while on their way to achieving what seemed aggressive three years ago,” said Chris Whitmore, an Deutsche Bank AG analyst in San Francisco who rates the shares “buy” and doesn’t own any. “I think now they’re going to get a lot of questions around revenue growth.”
IBM spokesman Michael Fay declined to comment on any plans for the investor briefing.
The company has said earnings per share will grow more than 10 percent this year, to at least $11.20.
The company has struggled with revenue growth for years. Its highest growth in recent years was the 9.8 percent rate in 2003. IBM hasn’t increased revenue at rates of 10 percent or more since 1995.
Revenue is projected to rise 4.3 percent this year, to $99.9 billion, according to the average estimate of analysts surveyed by Bloomberg, after falling 7.6 percent last year. Analysts project 4.1 percent revenue growth in 2011. The most bullish analyst estimate is for an average annual growth rate of 5.6 percent over the next two years.
Sluggish growth is one reason IBM’s stock price performance has trailed some of its peers. In the past five years through yesterday, IBM shares had increased 73 percent, while Hewlett- Packard’s stock had risen 136 percent. Oracle Corp., which has boosted revenue 13 percent on average through acquisitions, more than doubled over the same period.
IBM’s New Focus
IBM, based in Armonk, New York, climbed 81 cents to $127.70 at 9:47 a.m. in New York Stock Exchange composite trading. The shares had fallen 3.1 percent this year before today.
Since taking over in 2002, Palmisano, 58, has refocused what was once the world’s largest computer company on the higher-margin businesses of services and software, helping boost earnings. Though he hasn’t been as acquisitive as some rivals, Palmisano has spent more than $20 billion on 100 purchases.
IBM has said it will continue to invest in markets that help customers be more efficient, such as software that helps analyze or predict trends, or cloud computing, which lets them store and access information on shared servers. The company is also developing services to monitor highways, electrical grids and other infrastructure so they can be run more efficiently.
The company’s revenue growth this year, roughly in line with gross domestic product, isn’t enough to excite investors, said Paul Meeks, who helps manage $800 million as a principal at Winsor Asset Management in Charleston, South Carolina.
“He keeps delivering the mail, quarter after quarter, at least on the EPS side,” Meeks said of Palmisano. “However at some point, I need to see revenue growth.”