Wednesday, April 16, 2008

IBM - The Falling Dollar Ain't All Bad

If you want to see the benefit of the falling value of the U.S. dollar just take a peek at IBM's earnings release today. The headline is that they destroyed the analyst estimate of $1.45 by reporting $1.65. True enough, but lets look at the details and the quality of those earnings.

First off, revenue reportedly increased 11%, but if you take out the currency gain that growth shrinks to 4%. So, of the reported $2.5 billion increase in revenue, $1.6 billion of that came from currency.

Next, relative to the same quarter last year the company benefitted from a 1.0% lower tax rate.

If you take out the currency and tax benefit the company would have reported EPS of $1.29 instead of $1.65, barely ahead of last year's $1.23.

The other part of this is that the company has been a steady purchaser of its own stock. The purchases over this past year benefitted the company by another dime.

So, tonight and tomorrow when you're reading all of the glowing reports about how IBM knocked the cover off the ball, just remember that a minority of the strength really came from improved operations. This isn't a high quality beat.