MorningWord 12/31/13: $IBM – Dog Of The Dow

by Dan December 31, 2013 10:30 am • Commentary

Bloomberg had a story this morning that caught my eye on IBM, the only stock in the Dow Jones Industrial Average that will likely close down on the year, titled, “IBM’s Revenue Slump Turns Stock Into Dow’s Lone Loser of 2013“.  What I find so interesting is that investors have discounted IBM’s 10% earnings growth in 2013, and clearly see it for what it is, the product of financial engineering, the result of massive share buybacks, lower taxes and cost cutting (earlier this year they announced a restructuring that will eliminate 3300 jobs globally).

The stock’s languishing stock price is the result of declining sales (negative for the last 2 years and expected at just 1% next) and earnings growth, despite the tens of billions in share buybacks (lowering share count and raising eps) and job cuts that analysts expect to be half of what it was in 2011 next year at only 8%.

Enter the “Cloud Card”.  Per Bloomberg, in Q3:

IBM reported more than $1 billion in sales from cloud services last quarter, the first time it has disclosed revenue from that segment.”  While that sounds like a big number, it only represents 1% of the company’s annual sales, and barely moves the needle.  In 2014, will investors look differently on IBM?

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. Inc. (AMZN:US), which Gartner Inc. sees as the cloud leader, defeated IBM for a $600 million government cloud-computing contract this year.

As we all know by now, The Cloud has become one of those magic words that causes investors to lose their senses. ADBE has practically become AMZN in its ability to shrug off earnings miss induced selloffs and rally to new highs based on the hope of new cloud subscribers (new is loaded word in that case as most are existing customers coverting how they pay Adobe) If IBM is to follow suit in the cloud game they should literally just mention it every other word with vague promises of world domination on a continually rolling time window.

From a technical perspective, IBM bounced hard of what may have been a double bottom and the next obvious point of resistance would be just above 190:

Screen Shot 2013-12-31 at 8.24.51 AM
from LiveVol Pro

Volatility is pretty low considering the types of moves the stock has been making in the past few months:

Screen Shot 2013-12-31 at 8.26.57 AM
from LiveVol Pro

Earnings are in late January and the stock (and its options) should get increasingly volatile into that. February options are at about 19 vol at the moment and should be in the low to mid 20’s heading into late January.

We’ll continue to look at the name to see if there’s a trade there.