Wednesday, October 19, 2011

IBM's Revenue Growth

Tuesday's Wall Street Journal reported on IBM's quarterly earnings announcement with the headline Worries Persist for IBM and the subheading Tech Bellwether's Profit up 7%, but Contracts Disappoint.

I've written in prior posts that it seems passe to consider IBM a 'tech bellwether.' Be that as it may, the firms nominal year-on-year revenue growth was only 7.8%.

My proprietary equity performance research found that earnings growth isn't significantly related to changes in total return. Which means that managers will do whatever they must in the near term to make earnings targets, thus making them meaningless as indicators. In this case, doing so led to profit growth which almost matches revenue growth. The latter qualifies for being a high growth rate, unless you're talking about a conventional slow-growth firm. Otherwise, it suggests economic weakness.

But revenues are a different story. And IBM's near-flat revenues growth ought to trouble those who monitor the US economy. If the firm is a bellwether, be concerned.

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