MorningWord 11/16/16: Blues Clues

by Dan November 16, 2016 9:32 am • FREE ACCESS

Yesterday IBM’s CEO Ginni Rometty wrote an open letter to President-elect Trump offering:

ideas that I believe will help achieve the aspiration you articulated and that can advance a national agenda in a time of profound change. I do so as the leader of the nation’s largest technology employer, its leading patent creator, and the company that for more than 105 years has believed that prosperity and progress can be achieved by unleashing the potential of all people.


Creating “New Collar” Jobs

Building Intelligent, Secure Infrastructure

Healthcare: Applying Lessons from Private Sector Experience

Using Data to Fight Government Waste and Inefficiency

Bringing Money Home to Invest in America

Taking Care of Our Veterans – With the World’s Best Technology

They all seem fairly reasonable, albeit vague. Many are in the process of being implemented over the last 8 years. Bringing Money Home is a debate we’ll be seeing more of soon, and multi-national companies like IBM have a ton of it overseas. Few would argue that some sort of over seas cash repatriation is necessary , but the terms on which we bring that cash back and at what rate it is taxed is what’s always been disputed. Economists now look at the 2004 cash amnesty/repatriation as a bit of a missed opportunity as it did not have the intended results.

On a political note, what’s interesting about the source and tone of this letter is that it comes from a female CEO of one of the the largest tech companies. Prior to the election she was apolitical, while IBM’s arch rival’s CEO, Meg Whitman of Hewlett Packard Enterprises (HPE) had been a staunch critic of Trump, and a Clinton supporter, despite being the 2010 Republican candidate for Governor of California. Those relationships between the tech world and the new White House will be something to keep an eye on.

Both IBM and HPE have out-performed the broad market in 2016, up 15% and 54% respectively, while HP Inc. (HPQ), the hardware side of the old Hewlett Packard (that was split in 2015) is up 34%. It may comes as a surprise, but the combination of HPE & HPQ’s 2016 revenues of $98 billion dwarfs IBM’s expected $80 billion in 2016. And while Rometty says she is the largest tech employer with 380,000 people, the combined Hewletts, and the upcoming closing of HPE’s spin-off and merger of their enterprise services division with Computer Sciences Corp (CSC) (in an $8.5 billion transaction, expected to close in Q1 2017) clearly puts pressure on these sorts of tech jobs in the U.S., and all the splits and mergers suggest these companies are trying to get smaller, not bigger.

I suspect 2017 will be the year that IBM’s management and board get hip to the fact that slicing and dicing up the company may be the way to unlock shareholder value.

Despite IBM’s ytd out-performance, the stock remains in a downtrend from the all time highs, still down about 27% from the all time highs, despite its 34% bounce from the 2016 lows. The stock is banging up against technical resistance with the next real support near $140, but obviously could be at a technical inflection point if it were able to establish a new range above the downtrend:

IBM 5yr chart from Bloomberg
IBM 5yr chart from Bloomberg

IBM’s eps is expected to drop 10% for the second straight year in 2016, with its 5th consecutive annual sales decline, both are expected to go positive next year. With a 3.5% dividend yield, any hints of split of their faster growing cloud /cognitive groups and this thing could rip.