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Peeking at IBM's Playbook: Acquisitions and Share Buybacks

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Part 9
Peeking at IBM's Playbook: Acquisitions and Share Buybacks PART 9 OF 11

Could IBM’s Stock Upward Journey Continue in 2017?

IBM’s Strategic Imperatives segment continues to grow

So far in this series, we’ve discussed IBM’s (IBM) acquisition of Agile 3 Solutions and the general trend in the IT (information technology) sector of resorting to share buybacks to boost earnings.

In fiscal 4Q16, IBM saw its 19th straight quarter without revenue growth. However, the company’s Strategic Imperatives segment, which comprises its investments in cloud, analytics, mobile, social, and security technologies, continues to grow. In the last 12 months, IBM’s Strategic Imperatives segment has garnered ~$33.0 billion in revenue, about 41.0% of the company’s total revenue.
Could IBM&#8217;s Stock Upward Journey Continue in 2017?

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In 4Q16, IBM reported revenue of ~$21.8 billion and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $5.01, beating analyst expectations by $160 million and $0.13, respectively. On a YoY (year-over-year) basis, IBM’s earnings grew 3.5%, and on a sequential basis, they grew 52.3%. Though IBM’s revenue fell 1.3% on a YoY basis, it grew 13.2% on a sequential basis. The strong US dollar (UUP) impacted IBM’s revenue by $300 million.

Although IBM’s Strategic Imperatives segment continued to grow, its revenue decline shows that this growth was not sufficient to make up for the weakness in its traditional businesses. However, IBM’s initiatives to invest in key areas such as VR (virtual reality), AR (augmented reality), the IoT (Internet of Things), AI (artificial intelligence), machine learning, and autonomous vehicles are expected to drive $13 trillion in spending in the next computing cycle.

Earlier in this series, we learned about Merrill Lynch’s bullish take on IBM stock and how it raised its price target from $185 to $200. In January 2017, IBM was selected by Cornerstone Macro as one of the “Dogs of the Dow.” Morgan Stanley (MS) also believes that IBM’s initiatives and investments in its Strategic Imperatives segment are underrated.

Therefore, considering the consistent growth in IBM’s Strategic Imperatives segment, we can infer that the company is focused on the future of information technology. IBM stock has gained ~36% in the last year, showing that market sentiment seems to be improving for IBM stock.

2017 guidance

In fiscal 2017, IBM expects non-GAAP earnings of~$13.80. It anticipates its FCF (free cash flow) to be 90% higher than its GAAP net income.

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