Cramer: IBM's Slow, Painful Turn Is Taking Longer Than Expected

 | Apr 19, 2017 | 4:28 PM EDT
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Few things are more difficult than a corporate turnaround. Yet turnarounds are vital when it comes to companies staying alive or even thriving, and you've got to stay so close to them to know if they can be pulled off or if they will fail.

Today's turnaround, or lack thereof, has had such an impact it's knocking down the entire Dow Jones Industrial Average.

I'm talking about the failure of IBM (IBM) to demonstrate that it's made a successful transition from the slow-growing basic mainframe and software business to the fast-growing cognitive solutions craft that is so vital to restoring growth after what is now 20 straight quarters of revenue declines.

It's so powerful a tug downward that it's obscuring the turns going on in three other Dow stocks: McDonald's (MCD) , Walmart (WMT) and Coca-Cola (KO) .

Let's look at each.

IBM's in the midst of an incredibly difficult transition, one where it has to keep the balls in the air of the old regime, which is still the heart and lungs of many enterprises, as its chief financial officer, Martin Schroeter, explained on the company's conference call, and expand into the fast-growing areas that so much of so-called new tech dominates. IBM wants to be known as the company that uses Watson to tackle huge data problems connected with everything from health care to weather. It wants to be known as the place to mine data and put it to use, the more data the better. That business is growing well.

But at the same time, it has to keep signing old business at a pace that indicates there is enough health in the legacy business that it won't drag down the whole company's earnings.

IBM failed to do so. It didn't sign enough new business to make the numbers and produced an ignominious shortfall.

Now Wall Street has turned incredibly negative on IBM and CEO Ginni Rometty for missing the quarter. Some are saying it is making the numbers by lots of one-time-only gains and considering them as earnings, including licensing intellectual property. I think IBM is totally justified in doing what it's doing. I also believe that had IBM signed up the business it wasn't able to, it would have made the quarter and everyone would be happy. I also believe CFO Schroeter isn't blowing smoke and the signings will occur this quarter.

All that said, IBM, which is a great American company, has taken too long to make the transition, and that's because trying to get a company the size of IBM with 386,000 employees to do this is about as tough a task as can be imagined. You often hear the analogy that it's like turning around an aircraft carrier. Nah, it's much tougher than that. They have steering!

Still, with a 3.5% yield, an incredible installed base of business, a partnership with (CRM) that will begin to produce results in the second half of the year and a promise that unsigned business will be signed, given by someone you trust? I don't want to sell shares in that company. I want to buy them.

Why bother?

OK, consider the three other Dow stock turnarounds: Coca-Cola, McDonald's and Walmart.

I don't know if you have noticed, but these companies have been gaining adherents on the Street and they are getting them because management has positioned the companies in a way that makes it so that earnings in the second half and in 2018 could be coming through far better than expected.

I have been in support of the turnaround at Coca-Cola ever since CEO Muhtar Kent announced that the company would become a smaller, leaner total beverage business and that he would hand that business off to a successor, James Quincey, on May 1.

Credit Suisse, in an upgrade today from Hold to Buy, lays out the case for the new Coca-Cola, which it says is lighter, stronger and more aligned so it "can now focus on what it does best: building global brands in a franchise model." The upgrade says that "growth is the new frontier," growth being the magic elixir that Coca-Cola has lacked for ages. And because the company re-franchised the bottlers, taking them off the parent company's hands, "the core Coke business will deliver EPS growth not seen for at least the last five years."

I trust this report. I trust the company. I think the turn really is at hand and Kent has made it so Quincey will be coming in hot. It will be a big turn. I still favor PepsiCo (PEP) over Coca-Cola because of the fabulous stewardship of CEO Indra Nooyi and the amazing snack-food business the company has. Still, these Coca-Cola stripes are going to change in a way that I believe will make you money. Again, you've got that juicy 3.4% yield that pays you to wait. Given Coca-Cola's balance sheet and reputation, I don't mind earning far more than the puny 2.2% you get from U.S. 10-year Treasury bonds. (PepsiCo is part of TheStreet's Action Alerts PLUS portfolio.) 

How about McDonald's? I have been a huge fan of Steve Easterbrook ever since he became CEO when the stock stood in the $90s back in 2015. It's now at $132. How did it get there? Because Easterbrook has re-energized the franchisees, the lifeblood of the company, by simplifying the menu, adding more natural and organic products and introducing more technology that is customer-friendly while saving costs. The man is inspirational and he's got the buy-in of those who really do the heavy lifting, the store owners, and that makes them more attentive, more willing to put more people on staff and more emphasis on being cleaner, brighter and more competitive in a dog-eat-dog world. That balance sheet is a thing of wonder and the company can take on all comers with low-priced offerings.

The turn is real.

You may have watched the stock of Walmart going up pretty steadily of late. You know why? Because the company's beginning to reap the fruits of the turn that CEO Doug McMillon sowed when he took over in February 2014. You may regret that you didn't get in when the stock hit its nadir back in November 2015, when McMillon lowered expectations and talked about spending more on stores, on e-commerce and on people to be more competitive. But the stock is simply back to pretty much where it was when McMillon took over. He's making bold, brave moves and they are paying off.

The higher wages have cut down turnover, which saves a gigantic amount in deadweight training. The e-commerce efforts now include free two-day shipping or a discounted price for 10,000 items if you pick them up at the store. They are able to lever that humongous store base and that fabulous balance sheet to make this offer. You are being paid 2.74% while you wait for everything to gel.

All of these companies -- Coca-Cola, McDonald's and Walmart -- share that key attribute of having enough money to pull off the turn. They all have leaders or new leaders who have re-energized the faithful and attract new shareholders, or can do so.

And IBM? I know people are on the fence. I know it has disappointed again. But a year ago, when I began to have faith in the turn, the stock was at $144. Now it's at $162. You could do a lot worse. I say hold on, they can get it right. That said, unlike these three other companies, the fact that the turn hasn't happened yet, since Rometti took over in 2012, leads one to conclude that if they don't get it right this year, then you have to believe the shareholder base, perhaps even including Warren Buffett, might demand change to finally get the job done.

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