IBM leads the street
IBM released earning statements showing that earnings jumped 26% due to higher software and services sales. This news comes just a day after Intel produced very good numbers, looks like the tech sector is the one to beat in 2008.
IBM derived much of the higher earnings from a weak US dollar which allowed its products to compete with cheaper Japanese and Chinese manufacturers. IBM spends much more to produce the same product but a cheap dollar means the product is cheaper for international buyers. IBM contracts are mostly long term, allowing for price adjustments that keep the company competitive and maximize earnings. Over half of all IBM business is in the form of an annual contract which keeps the money flowing even in a market slowdown.
IBMs fundamentals look hot, but there is still one startling statistic. New contract signings for future delivery dropped 2% year over year, while this didn’t impact the current statement, it will affect earnings from here on out. We may never know how influential that 2% is, as a new slew of orders could displace the difference.
As long as the USD stays cheap, IBM is set to do very well. The stock is testing its $127 highs during the dot com/ tech boom of the 1990s and early 2000s. While the company looks great, I’m looking for a drop back to $100 before I see it as a buy. The drop in future revenue is a little worrisome while the RSI and other indicators suggest a correction coming. A PE of 16 is not so bad for a tech stock, but the PEG of 1.4 is a bit unsettling.
No position until we see a correction. Its just not worth much more than $120 at this point.
