IBM Investor Day Did Not Exactly Rock the House

At its investor briefing Thursday, International Business Machines Corp. (NYSE: IBM) marched through a blizzard of numbers that ultimately did not have the intended effect on the stock’s price. Big Blue stressed its investments in new technologies and its returns to investors.

The presentation might well have proven its point too well. In the period 2012 to 2014, IBM’s return on invested capital amounted to about 60% to shareholders and 40% in R&D, capital spending and acquisitions. Between 2015 and 2017, the company returned about 43% of invested capital to shareholders and invested 57% in R&D, capex and acquisitions. Free cash flow totaled $13 billion last year.

For 2017, IBM reported $13.80 in earnings per share (EPS) and revenues of $79.14 billion, compared with EPS of $13.59 on $79.92 billion in revenues in 2016. In its guidance for 2018, IBM said it expects revenue growth and margin stabilization in 2018. The company also forecast full-year adjusted EPS of at least $13.80. Free cash flow for 2018 is forecast at $12 billion and free cash flow realization is forecast at “well over 100%.”

In its investor briefing this morning, IBM presented a “longer-term” model calling for low-single-digit revenue growth; mid-single-digit pretax income growth; high-single-digit EPS growth; and free cash flow realization of more than 90%. Free cash flow realization is defined as free cash flow to income from continuing operations.

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The company expects capex in the longer term to remain steady at around $11 billion and dividends that have averaged about $16 billion over the past three years to increase annually. Share buybacks averaging about $12 billion over the past three years are expected to reduce share count by about 2% annually in the longer term.

Investors have felt the sting of IBM’s rising investments in its businesses and have been voting with their feet. Shares lost 13% last year. Today’s investor presentation does not pose a significant shift away from the financial path the company has followed over the past three years. That’s probably why the stock is selling off.

IBM shares traded down about 1.3% in the noon hour Thursday, at $156.24 in a 52-week range of $139.13 to $179.49. The 12-month consensus price target on the stock is $170.75.

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