Ibm Sustained Growth Issues

IBM began operating as a computer manufacturer in the 80’s and soon became a leading growth company. But with time sustainable growth and value creation became a challenge for IBM. In the 90’s when the growth has slowed, IBM began to restructure its business to increase future earning growth. Growth in earnings per share in the late 90’s sent out a positive message to investors, but that growth in earnings may have been attributed to other factors other than value creation.

IBM’s sales growth rate from 1996-2000 was only at 3.08% (PV=75,947, FV=88,396, N=5). Annual growth sales were close to 1% in most years, much less than the 4% GDP growth rate. With increasing cost of sales IBM’s gross margin reduced from 40% in 1996 to 36% in 2000. Selling and admin expenses were reducing annually with the lowest costs in 1999 but this was due to the fact that they sold Global that year (p. 422) and not because of improved efficiency. Income from core operating activities increased by 8.36% from 1996-2000. Although sales were not growing, operating income was because they are selling off their assets.

IBM’s inability to generate a sales growth rate above the average inflation may make them seem less attractive to investor. IBM pays out a constant $20 dividend to attract those investors that are looking for a constant cash flow rather than capital gains. Value is generated when a firm is able to grow its earnings from operations, since IBM is not able to grow their sales they are not able to generate value for their investors. Sustainability is also hard to achieve since IBM is currently unable to increase normal earnings in the long run even though they have spent years restructuring their business strategy.

IBM’s quality of earnings growth may be challenged by the difference from income and cash from operations. Although depreciation does not have its own line on the income statements, it is assumed that it was charged since it was reconciled back into income in the...