IBM Breaks Its Shrinking Streak; American Express Outperforms, Too

MarketsMotley Fool

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross consider the state of IBM's (NYSE: IBM) long transition to the next phase of its life. Apparently, it has turned a corner, because fourth-quarter revenue was up, and profits beat analysts' average forecast. But the numbers didn't impress the market.

Then the guys weigh in on American Express (NYSE: AXP), which, like IBM, beat the forecasts but had to put some charges into its Q4 report and pause share buybacks because of the recent changes in the tax code. The real questions for investors, though, should be about the condition of its core lending business.

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A full transcript follows the video.

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This video was recorded on Jan. 19, 2018.

Chris Hill: For the first time since 2012, IBM's quarterly revenue rose. Fourth-quarter profits also came in slightly higher than expected. Matty, shares of Big Blue still falling on Friday. For anyone who thought, "Hey, they broke the streak, they turned the corner," not quite.

Matt Argersinger: No. I think, the first time you grow in six years might be -- and by the way, they used all the right buzzwords in the press release. You have --

Hill: Blockchain?

Argersinger: You have enterprise, you have cloud, you have blockchain, you have artificial intelligence --

Hill: I was kidding. Blockchain is actually in there?

Argersinger: Blockchain is in there.

Jason Moser: What do you think the "B" stands for, Chris? Come on!

Argersinger: They could have thrown Warren Buffett in there, too. They didn't, but they thought about it. But yeah, all that wasn't enough to get investors excited. We're only talking about revenue growth of 3%, by the way, year over year, so it's not really a big mover. By the way, they did have a loss of over $1 billion in the quarter, obviously because of a one-time tax charge of $5.5 billion. That's a tax that they're going to have to pay on accumulated foreign profits in order to bring cash back. It's also, they're lowering the valuation of the tax credits they had because of the lower corporate tax rate. They're just not worth as much.

To me, and I think all of us agree, IBM is a ship with a weird rudder. I don't know where it's going. I can't figure the company out. And I would say, where is the growth going to come from? Can they compete with Amazon or Microsoft in cloud? What does blockchain or artificial intelligence even do for a company like IBM or their customers? I have no idea! So, IBM, ignore.

Hill: Fourth-quarter revenue for American Express came in higher than expected, but shares falling a bit on Friday as AmEx is dealing with some charges related to the tax law changes.

Moser: Yeah, I think a lot of the stuff that Matty was just talking about in regard to the new tax legislation comes into play for American Express as well. I think the comp that most investors use today, to compare American Express, they compare it with things like Visa and Mastercard. They're a bit different now. American Express is more like a quasi-sort of bank. It's interesting to note that while they will continue to pay their dividend, they're suspending their share buyback program for the first half of 2018 in order to build that balance sheet back up. Because of that bank holding status, they have to adhere to some regulations and meet some ratios there.

Now, with that said, I think American Express is a good business. There's no question there. I think the big hurdle they face on the card side in the coming years is, is there some deterioration in that brand and the perceived value and being a cardholder as competition continues to heat up with companies like Visa and Mastercard really growing out their robust rewards programs? I think it's a tough road ahead for American Express.

Hill: By the way, Facebook announced this week that AmEx CEO Ken Chenault is going to be joining the board of directors at Facebook. Zuckerberg said he's been trying to get Chenault on the board for years. When I first saw this, my immediate thought, Jason, was, Facebook, getting into payment of some form. And if that is, in fact, the case, is Ken Chenault the right person for that?

Moser: I think that's generally the reason why something like this would happen. Payments, learning more how to treat consumers, Facebook is trying to figure out how to step into that realm and diversify its revenue stream. I don't know that Chenault is really the best name for this type of position. He's not leaving American Express on the highest of notes. But, with that said, I don't think that Facebook's entry into the payments market is going to be something of a homegrown nature. I think it's going to have to be something that's an acquisition of sorts. And whatever they decide to do, it's going to cost them a lot of money to get that presence.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser owns shares of Mastercard and Visa. Matthew Argersinger owns shares of Amazon and has the following options: long January 2019 $65 calls on American Express and short April 2018 $97.50 calls on American Express. Ron Gross owns shares of Amazon, Facebook, Mastercard, and Microsoft. The Motley Fool owns shares of and recommends Amazon, Facebook, Mastercard, and Visa. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.

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