IBM Has a ‘Credibility Issue’
Web Editor, "Mad Money"
A company can most please Wall Street, Cramer likes to say, by underpromising but overdelivering when it comes to earnings. IBM’s problem in its most recent quarter, reported Monday after the bell, was that it overpromised and then underdelivered.
That may not be what it looks like on the surface, as the company beat earnings estimates and delivered revenue growth in line with its own predictions, but analysts were watching another set of metrics that IBM had touted. And it missed those numbers by a long shot, which is why the stock was taken down $3.42, or 2.5%, on Tuesday.
The analysts had much higher hopes for IBM because the company used its May 12 analyst day to lay out an extremely bullish roadmap to 2015. CEO Sam Palmisano guaranteed – yes, guaranteed – the gathered crowd that earnings growth for the next several years would register in the double digits: 12% to 15% annually over the next five years, with $20 of earnings per share in 2015.
Now, the key here is that, long-term roadmap or not, analysts take their cues from these meetings. So they had to believe, given Palmisano’s statements, that the guidance for this most recent quarter was way too low. And they said as much in their follow-up notes. From Collins Stewart: IBM’s “revenue outlook could be conservative.” And Deutsche Bank: “conservatism embedded in target.” And BMO Financial: “roadmap to 2015—looks conservative.”
But what happened when IBM reported? Well, for one, the company announced revenue growth of 2%, only to disappoint analysts who were so bullish after the May meeting that they had raised their estimates to 4%.
“But the analysts didn’t get this one wrong,” Cramer said. “They were lulled into euphoria by a management team that was far too optimistic and too enthusiastic about the long-term for its near-term good.”
In short, IBM was to blame. And with that comes “a credibility issue,” Cramer said. Because the company was either overconfident for no reason or management there simply doesn’t know what it’s doing. Either way, there was no need for Palmisano to make such a bold prediction, and that has hurt their reputation on the Street.
So if you’re looking to buy a consulting and outsourcing-services play – and that’s IBM’s main business, accounting for 57% of revenues – Cramer recommended Accenture instead. Where IBM’s service bookings were weak this past quarter, down 12%, Accenture’s were better than expected when it reported back on June 23. CAN also delivered superior growth versus IBM across all geographies.
“Accenture used UPOD. They underpromised and overdelivered,” Cramer said. “Clearly UPOD is the way to go.”
When this story published, Cramer's charitable trust owned Accenture.
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