International Business Machines Corporations - Research Paper Example

International Business Machines Corporations (IBM) International Business Machines Corporations (IBM) Introduction International Business Machines Corporations (IBM) is one of the largest IT companies in the world. It produces and markets computer software and hardware. In addition to this, the company is also involved in hosting and consulting services as well as infrastructure in areas starting from nanotechnology to mainframe computers (IBM Inc, 2014). The company was founded in 1911, as computing tabulating company through mergers of three companies. Its head office is located in New York. Since the inception, IBM is well known for the quality of its products and services. In 2012, it was ranked as the 2nd largest firm in terms of number of employees around which are around 435,000 globally, the 4th biggest firm in terms of market capitalization, the 9th most profitable company and the 19th in the list of highest revenue generating business. It has 12 laboratories and the company has on its credit record for creating the most patents for the consecutive 20 years. There are several other players in the market competing with IBM. These competitors include Accenture PLC, Hewlett-Packard Company (HPQ), and Microsoft Corporation (NASDAQ, 2014). Overall industry sales are increasing globally since 2013. In the current year 2013-2014 sales are expected to increase by 6.5% and in the next year growth are expected to reach 7.5%. The expected growth rate is higher than the growth rate in the last two years that are 5.5% in 2012 and 0.4% in 2011. The impact of these expectations will definitely have positive impacts on the company in terms of growth in sales revenue and high profits as well as healthy cash flows (Stephen, 2013). Performance Evaluation Revenue There is a continuous decline in the sales revenue since last two years. It has gone down by 2% in 2012 and 4.55% in 2013. This decline is in contrast with the industry expectations mentioned above. The chairman of the company in her report to shareholders mentioned the reason for the decline that there in an adverse movement in the currency exchanges because it is operating in more than 170 countries around the world. Especially, there is a sharp decline of 4.2% in the revenue from Global Technology Services and 1olost 19% decline in revenue from Systems and Technology (IBM, 2013). Profitability In total, the net profit has declined by $121 millions in 2013 representing fall of 0.73%, but there is a continuous improvement in the net profit ratio since 2011. It has increased from 12.48% to 15.89% in 2012 and 16.52% in 2013. This year to year improvement is due to the effective controls over administrative expense for instance in total they decreased by $51 millions in 2013 as compared to last year, whereas, cost of sales is reasonably consistent as indicated by consistency in the gross profit ratio, which has increased by only 1.73% in 2011 (IBM, 2011). Earnings per share (EPS) Despite the decline in the total income for the year earnings per share has increased from $15.43 in 2012 to 15.06. This increase is due to the fact that the company had 1,094 million outstanding shares in comparison to 1,142 million shares in 2012 for the computation of the basic earnings per share. Dividend per share It is a good sign for the shareholders that the company has increased dividend from $3.30 in 2012 to 3.70 in 2013. P/E ratio on the other hand, presents slightly different results as it declined from 13.18 to 12.45 in 2013. The decline in the price earnings ratio suggests that the investors are losing confidence in IBM due to the lower profitability in the recent years. Share price at the end of 2012 was $191.55, which dropped to 187.5 by the end of 2013 (Yahoo Finance, 2013). Highlights from 1st quarter 2014 Reports of the first quarter for the year 2014 have been issued and the company is still struggling with the poor performance with revenue further down by 4% and net income for the quarter is down by 21% (Yahoo Finance, 2014). Future intentions The company intends to be competitive through better performance and high quality products. Keeping the tradition alive, IBM is still willing to investing more in research and development for advanced semiconductor technology. Current market capitalization is $I94.19 billion which is expected to be raised further due to expansion. Performance Comparison with HP Revenue There is a continuous decline in the revenue since 2011 and it declined by 5.4% in 2012 and 6.7% in 2013. Total decrease in aggregate revenue is $14,947 million in 2 years (HP, 2013). In comparison to this, IBM had 2% decline in 2012 and 4.55% in 2013. Some of the reason behind heavy decline in HP includes huge contraction in the personal computer markets, weak IT demand in enterprises and low consumer spending as mentioned in the annual report. In addition to there, there be pricing competitive pressure that resulted in a huge decline in the revenue during last year. Profitability In both companies, GP ratio is reasonably consistent which shows effective control over cost of sales. As far as net profit ratio is concerned, IBM is far better than HP. IBM has 16.52% net profit against 4.55% in HP in 2013. HP had net profit ratio of 5.5% in 2011, which converted into loss of 10.5% in 2012 as the company made a loss of $12,650 million due to heavy impairment of $18,035 million pertaining to goodwill and other intangible assets (HP, 2012). In contrast to this, in the same years IBM has 15.89% and 12.48% net profit ratio, which is reflecting a much better picture. Earnings per share (EPS) Earnings per share are driven by the relative size of outstanding shares and volume of profits (Khan & Jain, 2007). IBM has the highest EPS is 2013 of $ 15.06 in comparison to $2.62 in HP whereas in 2012 HP made a huge loss of $6.41 per share against EPS of $14.53 in IBM. Similar is the situation in 2011 where there is a huge difference between the two. Improvements in the EPS of HP as compared to previous years are due to the repurchase of common stock that decreased the outstanding shares by 154 million in 2012 and further 24 million in 2013. Dividend per share A dividend of $0.56 per share has been paid in the year 2013, which in 2012 was only $0.5 per share. In term of dividend payment, HP is slightly better which as paid a dividend of 2% and 3.5% of the share price in 2013 and 2012 comparatively. In contrast to this, IBM’s dividend payment is 1.72% and 1.97% of the share price in 2013 and 2012. PE Ratio PE ratio is affected by share prices, but HP is a better PE ratio due to the low share price in comparison. It P/E ratio is 28.5 in 2013, which was almost 50 in 2012 due to lowest share price in three years. On the other hand, IBM has a P/E ratio of 13.18 in 2012 and 12.45 in 2013. Future Direction IMB is willing to capture market though innovative and improved quality products. They commit to invest in the research as they do since the inception. On the other hand, managements of HP are also concentrating to improve operations with special attention given to enhance end processes. Besides this, the company is willing to strengthen the capabilities in the area of strategic focus to avail the opportunities of growth in the future. Conclusion Some of the performance indicators of both the competitors are discussed in detail. The results present the similar picture for both the companies that the overall industry is highly competitive and there are tough economic conditions. As far as the profitability of these companies are concerned, there is no comparison of HP with IBM. It is important to note that HP has more revenue in term of currency than IBM, but still has lower profits. Management of IBM has great control over operating expenses as compared to HP. Similar to profitability EPS in case of IMB is much better than HP due to the stability in the company’s earnings during last few years. Share price of the company is more stable than HP and it is lesser affected by the company’s performance. For instance, in 2013 IBM’s share price declined by only 2% due to a slight decline in the performance, whereas, for HP, it was declined by 44% in 2012 when the company sustained a huge loss. Overall performance of IBM is much better than HP during the period of last 3 years. Both the companies are struggling because of the tough economic conditions prevailing worldwide. Both intend to continue with their innovative capabilities and improved quality products. As suggested by Stephen (2014) the IT industry is expected to rise in 2014, existing conditions of both companies would improve in terms profitability as well as sales revenue. Recommendations Here are some of the recommendations to improve the existing situation in IBM More effective cost control strategies for operating expenses as well as cost of sales. Penetration in the new markets would definitely enhance the sales revenue. In order to avoid currency losses, hedging techniques should be used. List of references IBM Inc, 2014. About US. [Online] Available at: [Accessed 22 April 2014]. IBM, 2011. Annual Report 2011. Financial Statements. New York: IBM. IBM, 2013. Annual Report 2013. Financial Statements. New York: IBM. HP, 2012. Annual Report 2012. Financial Statements. California: HP. HP, 2013. Annual Report 2013. Financial Statements. California: HP. Khan & Jain, 2007. Financial Management: Text, Problems And Cases. New Dehli: McGraw Hills Publishing Limited. NASDAQ, 2014. International Business Machines Corporation Competitors. [Online] Available at: [Accessed 22 April 2014]. Stephen, B, 2013. Where in the world is grwoth. [Online] Available at: [Accessed 22 April 2014]. Yahoo Finance, 2013. Historical Prices. [Online] Available at: < HYPERLINK "http://finance.yahoo.com/q/hp?s=IBM+Historical+Prices" http://finance.yahoo.com/q/hp?s=IBM+Historical+Prices> [Accessed 22 April 2014]. Yahoo Finance, 2014. SEC Filing, Form 10 K. [Online] Available at: [Accessed 22 April 2014]. 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