Boston, MA 01/23/2014 (wallstreetpr) – International Business Machines Corp. (NYSE:IBM) was clever to have sensed the trouble in the personal computer market ahead of time and shifted focus to cloud and software. But according to one analyst, the company may have got it all wrong in issuing the five-year long earnings per share target.
Herb Greenberg of CNBC argues that IBM did not only disclose too much, but bit more than its mouth could accommodate. Perhaps the move to daggle $20 EPS was meant to sway investor confidence in favor of the company, claims Greenberg, but it could end up as a big embarrassment for IBM.
The story behind the ambitious EPS target
Having noted that making immediate big improvements to its earnings was difficult, IBM execs saw it wise to stick to a long-term plan spanning five years over which the company would turn $20 EPS. Towards this end, the company hopes that its software, cloud and even PC businesses will be able to turn healthy enough to power its growth. Also, the company looked into recoiling from low-margin operations while directing resources where margins are high.
Restructuring in the company such as staff cuts and expenses control were also part of the game plan toward the five-year target. But with years moving on faster and little progress being made, not only doubt has set in, but also panic among investors. For this reason Greenberg believes that IBM will end it all with many eggs on the face.
The problem with big EPS forecast
The problem that International Business Machines Corp. (NYSE:IBM) is finding itself in, and unfortunately one that it didn’t foresee, is the mounting pressure that has come with issuing of such big EPS target. This pressure is true because having let the word out, the company must meet the number regardless of what happens.
According to Greenberg, it looks nice on paper when IBM execs talk about operating leverage, share buyback and future acquisition. Nonetheless, it is a different thing altogether in real-life.
International Business Machines Corp. (NYSE:IBM)’s cash flow in fiscal 2013 declined by $3.2 billion to $15 billion. This suggests that the company has a long way to go in terms of cutting costs to realize the $20 EPS promised.
