IBM
IBM reported quarterly earnings that disappointed Wall Street again on Wednesday evening. Revenue weighed in at $22.48 billion against an expected $22.91 billion, containing a 23% drop in hardware revenue. Flat revenue, with a lot of the EPS growth coming from buybacks is an old story with IBM. Nevertheless, it ploughed on with its strategy of shifting its business more towards higher margin, growth areas such as cloud and big data analytics, rather than its hardware business. Indeed, on the latter point, IBM sold its low end server business to Lenovo for $2.3 bn in January.
I continue to hope that one day soon, Ginni Rometty will pull up the garage door and usher out a gleaming new IBM model, sleek, slick and ready for the battlefield, just like Hannibal used to do after the A-Team had resourcefully transformed an old banger into a tank by means of a screwdriver, hammer, and a bit of nous. I have added more IBM–this situation reminds me of AstraZeneca a few years ago: heritage, quality, potential, and (relatively cheap) price.
Diageo
Diageo reported a sobering quarter as they also struggled to find sales growth; in fact, organic net sales actually declined 1.3% for the quarter which reduces growth for the nine months of their year so far to a miserable 0.3%. It is no wonder they are trying to increase their stake in India’s USL. Never mind, it could be worse, Remy Cointreau’s sales declined 13.5 % for their year to the end of March. A lot of Remy’s sales fall was put down to a mean-spirited Chinese government crackdown on the excellent custom of donating a bottle of brandy to bureaucrats, in the course of a business transaction.
As an aside, it is a reminder of just how global a company like Diageo actually is, when you can find the following line in their statement “As a result of recent developments in Venezuela, including the new currency exchange mechanism and the related reporting implications…” Excuse my ignorance, but what recent developments exactly? I will have to pay more attention to the World News pages.
Nevertheless, I am sure that, in the fullness of time, people’s appetites for the creamy, black milkshake that is Guinness, amongst other beverages, will win out and Diageo will begin to bubble again. The day Jamaicans stop drinking rum, Irishmen stop drinking stout, and Russians stop drinking vodka, I will sell my shares and start playing the horses instead. In the meantime, I hope to top-up on Diageo later this month – today’s 4% fall makes the price 4% more attractive. Is it cheap? Definitely not, but hopefully it is reasonable.
RB Group
Reckitt Benckiser did muster some first quarter growth, with non-pharmaceutical sales rising 4% and total revenues for the full year expected to rise 4-5% at constant currency rates. Unfortunately, pharmaceutical sales (RB push a heroin substitute drug) fell 11% as the generic manufacturers move in to shoot RB’s fox, which highlights the company’s reasoning in trying to offload this business. There seems to be chatter about spinning-off the pharmaceutical division, presumably due to the fact that no existing company is interested in buying it. A small, runt company with no growth is something I could do without in my portfolio where enough of my bigger holdings are already labouring for growth as it is.
Meanwhile, in the CEO’s earnings call, Rakesh Kapoor reported that, as is usual for RB, the recent addition of KY Jelly to its portfolio is progressing well. The potential for synergies with its existing Durex brand will be of no surprise to more worldly readers.
Disclosure: Long RB., DGE, IBM
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.