January 23, 2013
At first glance, it appears that tech bellwethers Advanced Micro Devices Inc. (AMD), Google Inc. (GOOG) and International Business Machines (IBM) did quite well for themselves with their respective fourth-quarter earnings announcements—shares of each stock are up 6% to 8% this morning. However, while the headlines are strong, when I dug into the details I uncovered some fundamental differences between each of these companies' operating results. When it comes to one of these stocks, I don't want you to be lulled into a false sense of stability so let's see what's up.
Shares of AMD gapped up this morning and keep climbing. That's because the company beat earnings and sales estimates by a hefty margin. Advanced Micro surprised to the upside thanks to various cost-cutting measures like workforce reductions.
Then again, that's not saying a whole lot because the consensus estimate called for a 205% plunge in earnings and a 32% drop in sales! Instead, Advanced Micro posted just a 167% drop in earnings (its net loss widened to $473 million) and a 31% dip in sales. While Wall Street may celebrating the earnings and sales surprises, I think it's far too soon to whip out the noisemakers and party hats. After all, analysts expect Advanced Micro Devices to continue to hemorrhage money in the first quarter, with estimates calling for a 30% retreat in sales and a 233% nose-dive in earnings.
So despite today's rally I consider AMD a strong sell and I don't expect to change my recommendation anytime soon.
Google also caught analysts flatfooted after it announced that strong advertising revenues and lower income tax helped fuel robust top- and bottom-line growth. Compared with Q4 2011, consolidated revenues jumped 36% and to $14.4 billion while net income advanced 7% to $2.9 billion. Adjusted earnings weighed in at $10.65 per share, which topped the $10.52 per share consensus estimate by 1%.
This was a solid earnings announcement but the best is yet to come. While the recent $12.5 billion acquisition of Motorola will continue to weigh on earnings this quarter and the next (with analysts forecasting mid-single-digit growth), the company's bottom line is expected to accelerate in the second half of 2013. Meanwhile, sales are expected to grow at a double-digit pace indefinitely.
While my screens currently show GOOG with a C-rated Fundamental Grade, I expect this to improve once I've plugged in latest earnings results. GOOG is a buy.
Finally, IBM saw strong sales growth in several emerging markets—including the BRIC bloc—and this helped to offset flat growth in the Americas. IBM's software business also did particularly well in the fourth quarter, posting 3.5% sales growth. This, combined with better expenses control, helped propel IBM to 6% year-over-year bottom-line growth. In the fourth quarter, adjusted operating earnings weighed in at $5.39 per share, beating the $5.25 consensus estimate by 3%.
But what really energized IBM stock today was the company's 2013 guidance. This year, IBM expects operating earnings of at least $16.70 per share, coming in well above the Street view of $16.63 per share.
I currently have IBM down as a hold and the jury's out whether I'll change my stance once I import the latest earnings data into Portfolio Grader. I like IBM's sales and earnings prospects, but institutional buying pressure (as shown by IBM's current D-rated Quantitative Grade) is going to have to strengthen for this stock before I feel comfortable upgrading it to a buy.
All in all, it's still encouraging to see some of Wall Street's biggest tech players trumping estimates. With Apple Inc.'s (AAPL) earnings announcement coming out after the close and more to come later, you can bet that I'll have regular updates in the coming days.