This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By Bruce Jackson (TMFGoogly)
Baker Street, London -- Late last Wednesday, computer hardware, software, and services company IBM (NYSE: IBM) announced mixed 3rd quarter results, and accompanied them with an unexpected profit warning. The shares fell 15% on Thursday, dragging the Dow Jones Industrial Average down with them, although that bellwether index fell by a mere 0.19%.
Surprise, surprise! IBM have seen a slowdown in the sales of large servers and operating systems software because customers are battening down the hatches in advance of Y2K. Is your company doing any major hardware upgrades this side of the millennium? Probably not. However, that doesn't mean you don't need that upgrade. It's just that you're happy to defer that purchase until the new year. Or so IBM are hoping.
Many UK information technology companies have had a great run in the last 12 months, and I'm not just talking about their share prices. One of the things Rob and I learnt from the recent Misys (LSE: MSY) analyst seminar was that sales have most definitely been boosted by increased corporate spend in advance of both Y2K and the introduction of the euro. In fiscal 1998/99 (June 1998 to May 1999), Misys' operating profit was skewed towards the first half of the year, whereas normally it is loaded more towards the second half.
Misys has always been very honest and clear with analysts and shareholders when saying that it doesn't expect the growth numbers of 1998/99 to be repeated. In July, in the annual report, Chairman Kevin Lomax said;
"Overall we would expect, once the potentially slower period around the millennium is passed, that the Banking and Securities Division will enjoy the strong underlying growth rate which preceded the recent major expansion in demand fuelled by the Euro and Y2K."
The 'underlying growth' Misys is aiming at is 20% per annum. That's no easy task, particularly when in revenue terms, the company is getting bigger and bigger. Misys is a very acquisitive company, and can obviously go out and buy revenue growth, but that does not necessarily translate into earnings per share and free cash flow growth. The latter is the measure which really counts, over the long-term.
Which brings me onto another somewhat unrelated point. It is very simple for a company to grow its earnings. By throwing a lot of capital expenditure at something, a company should be able to increase its earnings per share. This could be achieved by, say, opening up 40 new branches of your new and innovative chain of Bricks & Mortar.com stores. However, if your return on investment is only 3%, and not expected to rise, you will be destroying value. Rising earnings may disguise this in the short term, but eventually your company will be found out. This is one of the big reasons why Marks & Spencer (LSE: MKS) is in the doldrums.
By the way, when the Qualiport sold M&S in May this year at 392p, one of the valuation numbers I bandied about on the message boards was 216p. With the shares now down at 277p, that level is almost looking in reach. In the short term, I can't see the shares hitting that level, because the dividend yield would rise to a rather attractive looking (as long as the dividend is at least maintained forever more) 6.7%. I sincerely hope M&S recovers. If the company does, its share price will recover too. But, it may be a long haul for shareholders who've already been with the company for quite some period of time.
Back to IBM. You may be wondering where all this IBM stuff is taking us? On fears of this known Y2K slowdown, any company with any big ticket purchase exposure saw its shares walloped last Thursday, Misys being no exception. However, as it so happens, all is perhaps not too rosy at just IBM. Reading through this piece on our US site, it seems IBM may not just be experiencing a Y2K slowdown. It may well be losing market share to competitors such as Sun Microsystems (Nasdaq: SUNW), in which case we may be largely looking at a stock-specific rather than an industry problem. If that's true, it could lead to a buying opportunity.
Two weeks ago today I had a look at Misys' valuation, saying I'd consider topping up the Qualiport's holding if the shares hit 470p. Last Thursday, during the IBM-led carnage on IT shares in general, Misys briefly dipped below that level, as it lost 7% of its value on that day. One of the difficult things about running a fully accountable real-money portfolio is that we can't take action as and when these opportunities arise. There's no smoke and mirrors here -- what you see is what you get. We always announce our buys in advance of actually making the trade, saying we'll do so in the next 5 trading days.
Today Misys shares have closed at 469p, just below my top-up price. The shares have fallen 11% in the past 2 weeks to a level I thought may never come, or at the very least would take longer than just 10 trading days. Not to worry, as I like buying opportunities. For the fourth time in less than a month, I going to put my money where my mouth is and announce a Foolish top-up of Misys.
I've added £138.74 interest received to the Qualiport's cash pile, bringing the cash holding up to £1,032.56. Sometime in the next 5 trading days, in accordance with the Fool's trading rules, I will buy £1,010 worth of Misys shares, leaving the additional £22.56 to mop up dealing charges. The Qualiport cash coffers, for the first time since October last year, will be empty. More thoughts about this part of the portfolio's management on Wednesday.
With the usual great sense of market timing, last Friday I bought an additional 99 shares in Emap (LSE: EMA) at 787.5p. Today the shares dropped 55p to 730p. Go figure! The only news I could find was that the company had approved proposals to establish a US staff stock purchase plan. Obviously that news in itself couldn't have done the damage today. One can only speculate that the market is fearing the worst when Emap announces its interim results on 15th November, and that they will announce some sort of second half profit warning.
That's pure speculation on my behalf. Sometimes the knowledge of the market is greater than your own. You have to respect that power. Why do you think it is that share prices often move sharply in advance of a company releasing price sensitive information, whether that be a profit warning or a takeover announcement? (Did someone say insider information?) Other times, however, the market is being completely irrational. Based on the known facts about Emap, this looks like a classic case in point. As some of the posters to the Emap message board have said, sometimes you just have to trust your instinct and take the plunge, knowing there may be short-term pain before the hoped for long-term gain. As I said in this post, there's always a reason not to buy.
There's some interesting threads on the Qualiport message board which Fools may like to read and comment on, including thoughts about this portfolio's poor (to say the least) performance in 1999. Feel free to let us know your thoughts. Is the Misys buy the last throw of the dice?
Our latest offering, the Breakfast Fool, started this morning. For the Foolish view on one of the day's breaking stories, tune in by 9.30am each market morning.
See you on the message boards and back here on Wednesday, when the Qualiport soap-opera continues.
Company Change Bid DELL(US)+0.40 39.80 EMA -0.55 7.25 IIG 0.00 2.53 MSY -0.06 4.67 PIZ -0.03 8.12 RTO -0.04 2.00 ULVR +0.06 5.45 LLOY +0.08 7.63 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 04/11/98 245 Pizza Exp 7.93 8.12 2.5% 29/09/99 356 Lloyds TSB 7.56 7.63 1.0% 27/10/98 1133 Indep Ins 2.60 2.53 (2.7%) 27/01/99 74 Dell (US) 44.63 39.80 (10.8%) 22/04/99 348 Misys 5.76 4.67 (18.9%) 19/12/97 783 Rentokil 2.55 2.00 (21.6%) 17/07/98 266 Unilever 7.53 5.45 (27.6%) 17/04/98 301 Emap 10.20 7.25 (28.9%) Last Rec'd Total # Company In At Value Change 04/11/98 245 Pizza Exp 1966.34 1989.40 23.06 29/09/99 356 Lloyds TSB 2723.20 2716.28 (6.92) 27/10/98 1133 Indep Ins 2990.63 2866.49 (124.14) 27/01/99 74 Dell (US) 2007.42 1784.97 (222.45) 22/04/99 348 Misys 2028.71 1625.16 (403.55) 19/12/97 783 Rentokil 2046.53 1566.00 (480.53) 17/07/98 266 Unilever 2052.00 1449.70 (602.30) 17/04/98 301 Emap 3139.85 2182.25 (957.60) Cash: £1,032.56 Current Total : £17,212.81 Total Invested: £20,184.62 Profit/(Loss) : (£ 2,971.81) Value Per Share Day Month Year Qualiport -0.94% -5.73% -18.50% FTSE 100 -0.82% -0.34% 2.16% FTSE All Share -0.63% -0.77% 4.87%