The Ratings Game: IBM’s layoffs aren’t helping the stock, as analysts still fret about cash flow

by | Jan 26, 2023 | Stock Market

International Business Machines Corp. shares slumped Thursday after analysts picked apart Big Blue’s free cash flow results and outlook amid layoffs, and found a “mixed blessing” in the company’s drive to shift focus away from earnings. IBM
shares fell as much as 5.5% to an intraday low of $132.98, while the Dow Jones Industrial Index
— which counts IBM as a component — was up 0.2%, the S&P 500 index
rose 0.5%, and the tech-heavy Nasdaq Composite Index
gained 1%.

IBM reported its largest sales increase in a decade Wednesday, an increase of 5.5% to $60.53 billion, but Wall Street was much more concerned with free cash flow, or FCF, which came in well below expectations at $9.3 billion with a forecast of $10.5 billion for 2023 FCF. IBM confirmed thousands of layoffs to MarketWatch independent of earnings, though executives did not discuss those cuts nor their relation to cash flow in Wednesday’s report and conference call. Analysts surveyed by FactSet had forecast FCF of $11.03 billion before earnings. A year ago, IBM Chief Executive Arvind Krishna had forecast $10 billion to $10.5 billion of FCF in 2022, and had refused to issue an EPS forecast. Read: IBM posts biggest annual sales increase in more than a decade, announces 3,900 layoffs MoffettNathanson analyst Lisa Ellis said IBM’s report showed the “mixed blessing” of FCF at work. Ellis said that when Krishna became chief executive three years ago, he eliminated any focus on earnings per share, opting to focus more on revenue growth and FCF. “The mixed blessing of the FCF-centric objective is that there’s nowhere to hide —it’s transparent, and it is what it is, for better or for worse,” Ellis said. One example Ellis cited, and one of the reasons she upgraded IBM to market-perform last week, was the company’s divestiture of its managed infrastructure-service business that became Kyndryl Holdings Inc.
Ellis said that while Kyndryl before the spin …

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