A Company analysis paper for companies

IBM, HP and Accenture in the industry of IT

service, Technology Sector.

Company
Analysis
Project

Submitted on 5/6/2015

Rahul Satish Bhosale

Summary

Following are the findings for the company IBM, based on data collected from Research insight.

IBM 13-Dec 12-Dec 11-Dec 10-Dec 9-Dec

Revenue $99,751.00 $104,507.00 $106,916.00 $99,871.00 $95,758.00

NOPAT $14,925.78 $16,299.11 $16,126.67 $14,430.79 $13,640.20
market capitalization
(Price * #Shares) $197,772.13 $214,031.84 $213,886.10 $180,220.25 $170,868.61
market capitalization $203,673.64 $216,438.47 $216,724.28 $182,328.91 $171,950.63
ROA 0.131 0.139 0.136 0.131 0.123
ROE 0.719 0.874 0.783 0.640 0.590
Profit Margin 0.165 0.159 0.148 0.148 0.140
Asset Turnover 0.790 0.877 0.918 0.880 0.878
stock price $173.971 $189.832 $183.882 $146.762 $127.912

ACN 14-Aug 13-Aug 12-Aug 11-Aug 10-Aug

Revenue $31,874.68 $30,394.29 $29,777.98 $27,352.91 $23,094.08

NOPAT $3,182.50 $3,022.08 $2,878.36 $2,580.17 $2,173.23
market capitalization
(Price * #Shares) $50,946.13 $45,954.11 $39,016.15 $34,374.45 $22,876.39
market capitalization
(By Research insight -
Market Value) $51,168.48 $46,590.34 $39,103.74 $34,534.63 $23,324.08
ROA 0.177 0.211 0.170 0.162 0.161
ROE 0.505 0.655 0.611 0.587 0.629
Profit Margin 0.100 0.117 0.095 0.093 0.089
Asset Turnover 1.778 1.802 1.787 1.739 1.799
stock price $94.441 $82.512 $65.662 $51.832 $48.492

HPQ 14-Oct 13-Oct 12-Oct 11-Oct 10-Oct

Revenue $111,454.00 $112,298.00 $120,357.00 $127,245.00 $126,033.00

NOPAT $7,636.65 $7,101.62 $7,862.59 $9,854.91 $10,848.55
market capitalization
(Price * #Shares) $65,993.66 $46,495.11 $27,185.31 $52,967.37 $92,651.87

1
The Stock price is taken from Google Finance as of 5/4/2015.
2
The value of the stock price is collected from Google finance as Stock Price at the end of year for 2013 (ACN,
HPQ), 2012 (IBM), and rest years for all companies.

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 market capitalization $66,961.95 $46,834.85 $27,231.33 $52,873.19 $95,335.91
ROA 0.049 0.048 -0.116 0.055 0.071
ROE 0.185 0.185 -0.554 0.183 0.218
Profit Margin 0.045 0.046 -0.105 0.056 0.070
Asset Turnover 1.080 1.063 1.107 0.982 1.012
stock price $33.651 $28.192 $13.682 $25.762 $42.102

According to the tables above, a steadiness in revenue can be seen for company IBM whereas there is

growth in revenue of Accenture. The Revenue of HP is steady for two years then there is a sudden

increase after which it fell down and staid almost same for another two years. HP have double the

NOPAT that of Accenture while IBM have double the NOPAT as that of HP. I calculated Market value by

two methods, one by Price * # of Shares outstanding and the other by Market value taken from

Research Insight. Both values for all companies are similar if not the same. Again while Market value of

HP is greater than Accenture, IBM wins here as well. Though HP has higher Revenue than Accenture, its

profit margin is too low which is causing to drop Asset turnover and ROA. There is a reverse curve in

Stock price and Market capitalization as that of Revenue for Accenture. For HP the first two years in

table the value of the stock price is dropping until the third year, and then the stock price grew though

Revenue started falling.

Industry in brief

IBM, Accenture and Hewlett-Packard (HP) works in Information technology services industry in

Technology Sector. Services such as software support, computer systems design, and data processing

facilities management are provided by the companies in this Industry. The major companies in the

industry are HP, Accenture and IBM (US based), Cap Gemini (France), Tata Consultancy services (India),

Fujitsu and NTT data (Japan) 3

3
http://www.hoovers.com/industry-facts.information-technology-services.1119.html

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The revenue of the industry has increased by average six percent between 2010 and 2011, totaling $606

billion in 2011. Only in Unites States itself there are more than 100,000 software and information

technology (IT) services companies exists, from which more than 99 percent are small and medium-sized

firms (i.e., under 500 employees). This total includes software publishers, suppliers of custom computer

programming services; computer systems design firms, and facilities management companies. The

industry draws on two million and growing number of highly educated and skilled U.S. workforce.4

Basic business strategy:

IBM’s current global business strategy is based on three pillars: Cloud, data and engagement. Embracing

cloud technology is effort evoking. It means that all the clients who are using the services at their sites

will access it remotely. For this matter the use of Watson – supercomputer will help the transition.

Because cloud computing keeps the technology at the provider’s site rather than client site, it reduces

the risk of piracy and will help lower the cost of technology. As a result, clients in emerging markets can

access that technology even if the intellectual property protection in their country is low. Second, use of

data as natural resource and refine to gain important insights about the frontier market. Help clients

and understand data to enhance their profit, lower the cost and wastage of resources. Advances in

cloud computing and data refinement would matter only if the users are engaged with these advances.

“Engagement is the framework through which IBM thinks about innovations in mobile computing, social

networks, and security”. Though there is much has been written about the mobile revolution in frontier

markets, the security of using the cloud technology is discussed very little.

4
http://selectusa.commerce.gov/industry-snapshots/software-and-information-technology-services-industry-
united-states.html

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Recent events:

1) IBM Positions Itself as Large Broker of Health Data5

IBM has announced to partner with leading Pharmaceutical Company Johnson & Johnson, an Irish

medical device company Medtronic and Apple Inc. It has also acquired two Medical data companies, in

order to enter into healthcare data services. IBM will use its data analysis experience and will develop a

new generation app for patients and health providers. IBM, J&J and Medtronic will share revenue from

the sale of app whereas Apple will get a cut from the apps sold through App Store.

2) IBM continues Painful Transition6

For the 12th straight quarter, IBM’s hardware sales are declining. The first quarter this year marked the

hardware sales at $1.7 bln which was $2.4 bln last year same quarter. Revenue dropped from $19.59 bln

from 22.24 bln due to surging US dollar and shrinking hardware sales combined. As a new strategy IBM

plans to continue in Software and cloud based services with a budget of $4 bln this year which last year

generated $25 bln in revenue. IBM hopes to grow this Revenue to $40 bln this year.

3) Japan Post Teams With Apple, IBM to Better Serve Elderly7

Japan post, the biggest bank of the world and largest insurer of Japan, having 24000 post offices

throughout Japan have teamed up with Apple and IBM to deliver the better service to its elderly

customer of Watch Service started in late 2013. IBM will design a software app for iPads which will assist

the elderly; reminding them about their medication, exercise tips and also protecting them from scam

that target elderly. Japan post watch service is on small scale right now with 100 customers but they

plan to increase about 1000 more later this year. Company also aims to turn this program into regular

business starting April 2016 and reach 4 mln customer base by year 2020. The service fee for now is

about $8.40/month, though the later service fees and charges yet to decide.

5
http://www.wsj.com/articles/BT-CO-20150413-710214
6
http://www.wsj.com/articles/ibm-reports-another-revenue-decline-1429561027
7
http://www.wsj.com/articles/BT-CO-20150430-710539

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IBM vs. HP vs. Accenture - business model difference and similarity:

IBM is working in multiple fields in Information technology sector. It has Software and Hardware

divisions. IBM is doing IT consulting services as well. HP like IBM is working in consumer as well as

corporate hardware and software market also HP has BPO and consulting division. Accenture, unlike

IBM and HP, is not into hardware manufacturing business, though it is one of the top IT consulting firm

which is in competition with IBM and HP’s IT consulting services division.

Financial Statement analysis

IBM 13-Dec 12-Dec 11-Dec 10-Dec 9-Dec Avg Growth

Sale -4.55% -2.25% 7.05% 4.30% NA 1.14%

Operating cost 0.04% -2.89% -0.33% -3.26% NA -1.61%
Total assets 5.88% 2.39% 2.63% 4.06% NA 3.74%
Operating profits -8.43% 1.07% 11.75% 5.80% NA 2.55%
ACN 14-Aug 13-Aug 12-Aug 11-Aug 10-Aug Avg Growth

Sale 4.87% 2.07% 8.87% 18.44% NA 8.56%

Operating cost 6.42% 18.83% 6.87% 10.58% NA 10.68%
Total assets 6.30% 1.21% 5.94% 22.56% NA 9.00%
Operating profits 5.31% 4.99% 11.56% 18.73% NA 10.15%

Sale -0.75% -6.70% -5.41% 0.96% NA -2.97%

Operating cost -6.01% -9.50% 2.23% 3.40% NA -2.47%
Total assets -2.34% -2.84% -16.02% 4.03% NA -4.29%
Operating profits 7.53% -9.68% -20.22% -9.16% NA -7.88%

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 Sales Operating cost
$140,000.00 $6,000.00

Sales in millions of $

OC in millions of $
$120,000.00 $5,000.00
$100,000.00 $4,000.00
$80,000.00
$3,000.00
$60,000.00
$40,000.00 $2,000.00
$20,000.00 $1,000.00
$- $-
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal Year Fiscal year

ACN HPQ IBM ACN HPQ IBM

Total Assets NOPAT

$140,000.00 $18,000.00
Total Assets in milions of $

NOPAT in millions of $
$120,000.00 $16,000.00
$14,000.00
$100,000.00
$12,000.00
$80,000.00 $10,000.00
$60,000.00 $8,000.00
$6,000.00
$40,000.00
$4,000.00
$20,000.00 $2,000.00
$- $0.00
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year

ACN HPQ IBM ACN HPQ IBM

Free cash flow Net Investment

$6,000.00 $5,000.00
Net Inv. in millions of $

$4,000.00
FCF in millions of $

$4,000.00
$2,000.00
$3,000.00
$2,000.00
$-
$1,000.00
$(2,000.00) $-
$(4,000.00) $(1,000.00)
$(6,000.00) $(2,000.00)
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year

ACN HPQ IBM ACN HPQ IBM

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Three Financial statement items:

For the company IBM, there are three items which seized my attention; those are Tax, Net cash from all

activities, Market to Book value. Regarding the Tax and Tax rate, when I calculate the Tax rate from the

operating profit, the Tax rate seems constant for the

Total income TAX
first 4 years but the last one i.e. 2013, where it falls
25000.00
20000.00 to unreasonable number of 16% from average of
15000.00
10000.00
5000.00
0.00
(5000.00)
(10000.00)
(15000.00) 24%. When I look at the HP income statement, I see
2014 2013 2012 2011 2010 2009

ACN HPQ IBM similar situation and in addition to that in 2012 the

EBIT for HP falls below zero whereas the Tax is above zero. Based on some research I found that the Tax

paid and recorded on income statement includes

Change in cash
some other factors which affect the total income
5000.00
taxes. This might be because the depreciation is 4000.00
3000.00
allowed to be considered as expenses on a company 2000.00
1000.00
financial statement while the method for depreciation
0.00
recording and depreciation calculation might differ. (1000.00)
(2000.00)
(3000.00)
Regarding net cash from activities, the total change in (4000.00)
2009 2010 2011 2012 2013 2014
net cash for IBM for the year 2009 and 2010 is
ACN HPQ IBM
consistently negative which jumps above $1 bln and

again drops more than $1.5 bln below zero. Here the total net cash flow from Investment and Financing

activities are generating negative cash flow except the year 2011 where IBM lowered investments

causing lower negative cash and in year 2013 the additional long term debt issuance caused lower

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negative cash. Thereby with other cash it is forcing total net cash flow to positive. Similarly HP has

decrease their investment over the years and increased financing activities because of which even

though their operating cash flow is consistent, overall their net cash flow is improving after a slight

curve. Unlike HP and IBM, Accenture with consistent operating cash flow has seen increasing investment

activities and decreasing cash flow from financing activities forcing decreasing net cash flow every year.

Note: Please see the Statement of Cash flow for the values in operating, Investment and financing
activities supplied in Appendix.

The interesting fact about Market to book, similar to IBM’s financial items, the stockholder’s perception

about IBM’s value is more than its actual/book value. Also the investor’s perception is almost consistent

with the average of 9.5.

IBM Dec13 Dec12 Dec11 Dec10 Dec09

Market to Book – Daily 10.25 10.05 9.72 8.2 9.35

Here it is interesting to see that HP’s Market to book value is decreasing from year 2009 to 2011 which

was the financial crisis duration, which also caused HP to see drop in EPS below zero from year 2012.

After that HP has succeeded in earning investor’s trust. Accenture on the other hand has seen consistent

Market to book value from 2009 to 2012 which is about average 8, then it started falling. This coincides

with its negative cash flow and it must be result of increasing book value of equity since market value is

almost consistent for years.

One outlier financial statement item:

The Differed Tax from statement of cash flow of IBM has a sudden drop in year 2013, which is not the

case for HP at first look. Also Accenture’s differed Tax has a curve from negative to positive and back to

negative. After investigating the item and looking up for what differed tax means, “Deferred tax assets

generally arise where tax relief is provided after an expense is deducted for accounting purposes.

Examples of such situations include:

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  a company may accrue an accounting expense in relation to a provision such as bad debts, but

tax relief may not be obtained until the provision is utilized

 A company may incur tax losses and be able to "carry forward" losses to reduce taxable income

in future years.”8

By the definition and table below, it can be seen that differed tax coincides with the increase in

investment as a result of allowing Tax depreciation on fixed assets. As we can see, in case of IBM in year

2012 the investment has increased by 150% increasing the fixed assets which compounded the

depreciation tax increasing differed tax from 34% to 302% from previous year. On the other hand, HP

has already seen high investment in year 2012 with 913% high investment than previous year. As a

result of high investment the differed tax has also increased. Though it can be seen the period of

differed tax and investment for IBM are different (2012 and 2013) where in case of HP those are same

(2012), it is due to the relationship of sale of fixed assets. In the year 2012, HP sold more than previous

year and also the investment is increased due to which the sudden increase in differed tax.

Relation between change in deferred Tax and Investment increase

ACN 14-Aug 13-Aug 12-Aug 11-Aug

Differed Tax Change -65% 19% -10% -434%
Investment increase
change #VALUE! #VALUE! #VALUE! #VALUE!

HPQ 14-Oct 13-Oct 12-Oct 11-Oct

Differed Tax Change -92% -42% -528% -16%
Investment increase
change -13% 28% 913% 88%

IBM 13-Dec 12-Dec 11-Dec 10-Dec

Differed Tax Change -302% -34% -6% -27%
Investment increase
change 20% 150% -71% 13%

8
http://www.investopedia.com/terms/d/deferredtaxasset.asp

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Relation of current events effects on financial statement:

The healthcare industry is one of the biggest in the world and it has proven the growing market for data

analysis in order to help better serve patients. Use of data analysis is helping healthcare to early on find

out the outburst of a disease in any area as well as the best way to cure it. By entering into healthcare

for data IBM is committing to its strategy, the use of data. I believe, the investors will look at it

positively. From the second event, it is clear that IBM is not doing well in hardware sells and it would be

good to shift the focus from hardware to software consulting. For the same matter, IBM has acquired

few other companies which increased the total assets, equity and liability as well. The declining

hardware sells is putting pressure on revenue and the in hand inventory would likely to increase at the

end of the year if IBM don’t manage to sell. It can be seen the inventory has been consistent around

2400 on average for past 5 years. On the other hand partnering with Japan post for their Watch service,

software consulting and development division will benefit a lot, from the perspective of sales as well as

reputation and maker reach. Elder citizens of the world is the market which is largely untouched from

modern technology and by expanding to that market will help IBM’s total revenue in future if not now.

So overall, due to work in healthcare industry and Japan post’s watch service software, IBM’s service

revenue will increase though hardware sales are falling for the last 3 years.

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Ratio analysis:

Operating Profit Margin Profit Margin

0.25 20%
0.2 15%
10%

OPM in %

PM in %
0.15 5%
0.1 0%
-5%
0.05 -10%
0 -15%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year

ACN HPQ IBM ACN HPQ IBM

Total Debt Ratio Asset Turnover Ratio

0.88 2.1
0.83
Debt Ratio

1.6

ATR in %
0.78
0.73
1.1
0.68
0.63 0.6
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year

ACN HPQ IBM ACN HPQ IBM

ROA ROE
30% 100%
20% 50%
ROA in %

ROE in %

10%
0%
0%
-10% -50%
-20% -100%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year

ACN HPQ IBM ACN HPQ IBM

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The relation of ROA, ROE, Profit margin and Debt ratio

As per the financial ratio equations:

ROA = PM x Asset turnover

ROE = PM x Asset turnover x Equity multiplier = ROA x EM

Hence, when Profit margin and Asset turnover increase, it amplifies the ROA. On the other hand ROE

and ROA can only be equal in situation where Asset and Equity are exactly same, that is based on

fundamental accounting equation, when liabilities are null for a company.

Asset = Liability + Equity

This case is rare for large companies where they generally poses some sort of debt such as Note

payable, Bonds and so on. Which shrinks the Equity and thereby amplifying ROE and abbreviate ROA. In

another words Debt increase ROE and decrease ROA whereas Profit margin and asset turnover

contribute to ROE and ROA equally.

The relation between ROA, ROE and Tax, Net cash flow and Market to Book value

Items discussed previously in this paper, Net cash flow from all activities has similar impact on ROA and

ROE whereas Tax and Market to Book value have no direct impact on ROA and ROE. The net cash flow

from activities increase, if keeping sales constant, the investment activities will produce either higher

assets by purchase or higher short/long term investments. Similarly increase in financing activities will

increase debt or reduce cash by distributing dividends. Also increase in sales increase the total cash in

hand thereby increasing total current assets but reducing Inventory and adding up to COGS. Overall the

positive net cash flow either increase assets or liability and not both, which as discussed above, decrease

ROA or increase ROE.

Similarly, Tax increases the liability (TAX payable) and as well as cash at the same time canceling the net

effect on ROA and ROE. Also Market to book value does not impact ROA and ROE since it is an indicator

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of market perception of the over/under statement of companies’ book value than its market value and

company is doing well/poor on its return on asset, although the ROA and ROE might affect Market to

Book value.9

The effect of different business models on Firm’s financial ratios:

IBM is a conglomerate in Information technology sector with Hardware, software and IT business

consulting service divisions. Like IBM, HP also works similar way except dedicated software

consultation to business where Accenture works entirely in IT consulting. The business model of

IBM helps them to work innovatively since IBM is one of the pioneer in Technology innovation as

well as designer and manufacturer of devices such as Servers, computers which are used by

businesses. These helps IBM to conduct parallel business activities where they provide

software/consultation services to their hardware clients and sell hardware to their software clients.

Majorly in past IBM’s focus have been in hardware than software. HP on the other hand provides

hardware to business with hardware focused business model. Also Accenture give competition to

IBM in software consulting.

Because of these similar but different business model, there are few prominent effects can be seen

on financial statements, such as Accenture doesn’t possess inventory which causes proportionate

decrease in Assets. Hence even though Accenture’s net income is lower than IBM, the Return on its

asset is comparative to IBM’s ROA. Whereas HP’s higher inventory putting pressure on its ROA

keeping it below 10% for last 5 years. Similarly capital structure of Accenture, IBM and HP have

impact on their debt ratio as well. As already discussed above, Accenture’s debt is lower than that

of HP and IBM which decreases it’s ROE. Due to lower Asset (no inventory) in case of Accenture, it

9
http://www.investopedia.com/articles/fundamental/03/112603.asp

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wins the Asset turnover ratio over IBM and HP where their asset turnover fall below 1.2 due to

inclusion of inventory and higher other current assets as compared to their sales. Finally, as

Accenture is pure service based company, its profit margin falls between HP and IBM. Here IBM

takes advantage of diversification in the IT sector (declining Hardware, inclining software and IT

consulting service revenues) where HP loses the battle again due to hardware focused software

consultation.

Note: For the charts please see Profit Margin, Debt Ratio, Asset turnover ratio, ROA and ROE for
three companies.

Relation between three financial ratios and the current events:

Along with the strategy shift of IBM from Computer hardware manufacturing and selling firm to

Software consulting and cloud technology based software Development Company, I believe there

are 3 items which would be affected by the events discussed above in Current events section: ROA,

ROE, and Profit Margin. IT Healthcare is another booming industry currently and IBM is willing to

take advantage of demand and also its technology innovation ready to be used for the industry. The

impact of such business would improve service revenue along with slight increase in SG&A cost. As

IBM has already worked on the required technology for being healthcare data broker, it will benefit

IBM to keep SG&A cost at almost constant level while increasing revenue. As service will not incur

any COGS costs, the item will be at minimum for this business. This in turn increase the Net income

and if IBM doesn’t invest a lot in Assets by purchasing new, it will either keep steady or increasing

ROA.

On the other hand the declining sales of computer hardware will impact the inventory and COGS. As

COGS is recorded under matching principle, it will be less in case of less sales and there by less

revenue. As SG&A costs are fixed costs, even sales and COGS reduce, SG&A will stay same and thus

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resultant Net income would be less for hardware division. This will again impact ROA along with

Profit Margin due to declining sales.

Finally the same argument of increasing ROA and PM in case of health data industry applies to

project of Japan Post. The project will also create a new market pool, if adapted by other countries,

and will enhance IBM’s revenue multifold keeping it’s SG&A cost almost steady due to existing

technology and knowledge base developed for Japan post, increasing Net income.

Similarly ROE (the ratio of Net income to Equity) will increase with increase in Net income and

steady equity if the debts are kept constant. A pattern one year of negative and 2 years of positive

debt change can be seen from the cash flow statement of IBM. If the pattern follows through 2014

as well, then IBM’s debt will increase nullifying effect of the Net income from the above mentioned

new projects on ROE.

Conclusion:

After studying three companies’ financial statements, related current business events and relation

between business model and strategy of those three companies, IBM, HP and Accenture, the finding in

the summary of this paper are justified. Increasing and then decreasing revenue for IBM is the result of

strategy shift and new investments as well as new project undertaken. Also IBM is taking advantage of

diversified business services to increase and be on top in terms of Profit margin. I believe the estimated

revenue will cross $100 bln for IBM for the year 2014. On the other side, Accenture with targeted

business model in IT consulting and HP with Hardware and BPO/IT consulting are having significant

impact on market with large revenue share. The average revenue for Accenture is $28 bln which is high

for industry with only IT consulting services and HP with $119 bln which is above IBM’s $101 bln. Even

though Revenue is good indicator of business making money, other factors such as ROA, ROE and debt

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ratio, where HP is always falling behind IBM and Accenture, indicating that the other companies are

doing business in good way utilizing their resources strategically.

In conclusion, for the decision of making an investment in these three, I would make a portfolio, based

on P/E ratio and other factors, Accenture with higher weightage, IBM and HP with equal weightage.

Appendix: Attached herewith this paper

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