Who Says Elephants Can’t Cavort?
This was CEO Lou Gerstner’s book title back in 2003 about bringing IBM bet on a support from the brink of insolvency to lead the computer business once again. When you look at IBM today, the rearmost time revenue grew year-over-year was back in the March quarter of 2012. That is not a typo. 2012!
But we believe the elephant may be starting to warm up its dance moves with a new partner, the Z14 mainframe. The Z14 has pervading encryption which increases its cryptographic performance over the prior contemporaries Z13 by 7 times due to a 4 times increase in the amount of silicon dedicated to this charge.
Why does this matter? Yahoo recently admitted that all 3 billion of their accounts were butchered. More importantly Equifax, one of the nation’s three major credit relating firms, announced the unauthorized accessing of Social Security numbers and start dates of up to 143 million U.S. consumers. There are only roughly 325 million people in the intact US.
What is interesting is that of all the 9 billion data records that be struck by been hacked over the last several years, only 4 percent of them were encrypted. If assorted had been protected by encryption, it might have deterred some of those hackers. After all, what use is age a whole bunch of data if you cannot figure out what it means?
Do corporations fret about the new IBM mainframe? Roughly half of IBM’s mainframe business is in financial ceremonies. IBM mainframes handle close to 90 percent of all credit card doings ($7.7 trillion per year.) All of the 10 top insurers, 44 of the top 50 banks, 18 of the top 25 retailer and 90 percent of the largest airlines use IBM mainframes.
So what chanced when IBM launched the new Z14 on September 13th? IBM Z revenue grew 62 percent year on year in third quarter after being down 33 percent year throughout year in the prior quarter and systems hardware revenue was up 10 percent year floor year in third quarter after being down 10 percent year over year in the whilom before quarter.
As a result, after missing revenue expectations in the prior two fourths, IBM beat revenues by close to 3 percent in the September quarter. This was the best beat since the June quarter of 2011.
Though we estimate IBM mainframe receipts are less than 5 percent of the company’s total revenues, customers buy software, helps and storage as well that work with the mainframe. In total we conjecture that mainframes drive over 20 percent of IBMs add up to revenues and over 30 percent of IBMs total profits.
As for emotion, it could not be much worse. Less than 30 percent of Obstruction Street analysts have a buy on the stock and over 10 percent prepare a sell. IBM’s stock is down 7 percent in 2017 in a raging bull vend for all stocks but particularly technology stocks. As a result, IBM’s price to earnings correlation is a paltry 11 times versus the S&P at 20 times. IBM also has a dividend surrender of 3.8 percent versus the S&P at 1.9 percent.
How risky is the stock in the episode of a stock market sell-off? There are so few people left that are bullish on the cache that IBM was actually up on Wednesday when the S&P Information Technology Index slumped about 3 percent and the FANG stocks declined 4 percent.
The 3.8 percent dividend accede is also very juicy with the S&P dividend yield at 1.9 percent and 10-year resources yields at 2.4 percent. If we do finally get the long overdue correction in the transfer longest bull market since World War II, these defensive peculiarities, much like on Wednesday, will become a lot more meaningful.
In conspectus, IBM may have had two left feet for the last 5 years, but we think their new dance accessory, the Z14 mainframe, may get the elephant shimmying again over the next year.
Commentary by Dan Niles, set up partner of AlphaOne Capital Partners and senior portfolio manager of the AlphaOne Satori Support. Previously, he was a managing director at Neuberger Berman, a subsidiary of Lehman Kinsmen.
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