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Monday, April 20, 2009

A tale of two multiples ( $IBM $TXN )

IBM missed consensus revenues but beat on gross margins.  Services bookings were broadly in-line with long-term bookings outpacing short-term, a shift from recent trends.  Though IBM doesn’t grow so much, it doesn’t have much of a multiple either.  The company may shrink by 10% this year top-line, but EPS are telegraphed at $9.20 and the stock trades at a hair under 11* this year’s estimate – there are far worse bargains out there in technology with far less predictability in their models.  IBM is a notoriously defensive stock and tends to garner a premium multiple during slowdowns for the relative stability of its model.  That is largely the reason to own the stock over the near-term and there should be little change to that psychology over the near-term.

Texas Instruments, on the other hand, beat on revenues but disappointed on gross margins.  The operating performance was better than expected on the back of a $100mm beat to the top line.  The gross margin miss is concerning in light of the revenue strength.  Texas Instruments trades at north of 30* this year’s estimate, even assuming analyst estimate hikes of 20-25 cents for the current year on the back of the better operational quarter.  Though investors wish to argue these are trough quarters, it still remains very unclear how sustainable the present strength in the supply channel is.  Nokia, Texan’s largest wireless customer, has held up somewhat and didn’t really drop a lower demand bomb when they reported so they may prove correct – the problem is the stock is already factoring in a large degree of recovery by virtue of the multiple.

While IBM looks safe and cheap, Texas Instruments looks dicey and expensive.  I don’t think they make a good pair trade but they’re interesting counterpoints to one another.

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