Ahead of its quarterly earnings report, International Business Machines (NYSE:IBM) traded at above $130. Markets rewarded the stock price when the company said it would spin-off its “market-leading managed infrastructure services unit” in a tax-free structure for shareholders.
IBM’s quarterly earnings quickly ended the stock rally. The company once again disappointed the market with the third straight quarter of revenue declines. In the report, it posted a GAAP EPS of $1.89 but revenue fell 2.6% to $17.6 billion. Its debt of $65.4 billion, which includes $20.9 billion of Global Financing debt, is a glaring concern.
IBM continues to lag in performance. In the last decade, software companies like Salesforce (NYSE:CRM) in the CRM space and DataDog (NASDAQ:DDOG) in data analytics are a reminder of how slow IBM embraced change. The company may only engineer a financial restructuring to unlock the stock’s value by the sum of the parts valuation.
Investors are better off selling the slow-moving unit after the tax-free distribution and holding the growth stock only. Conversely, value investors seeking income may continue to hold IBM and the spinoff. That way, the investor gets a regular dividend with no upside and the spinoff with the potential to rise in the next few years.
