International Business Machines Inc (NYSE:IBM) is one of the world’s biggest technology companies. So of course we’re going to do a quick IBM stock analysis here at StockIdeas.org.
Now keep in mind…
IBM hasn’t really gone anywhere for the last year. But don’t take my word for it. Just look at the IBM long term weekly chart below:
Yet when you zoom in a little bit, you’ll find IBM is starting to show some nice relative strength, And it might have even put in a short term bottom. Now could it be on the verge of breaking out above previous resistance?
See for yourself…
As you can see from the technical analysis above, IBM stock is starting to see more buying. RSI is trending up. And IBM is holding above the short-term moving averages. So since IBM looks like it might be setting up for a push higher, let’s look at whether or not the fundamental analysis of the IBM stock supports this potential technical set up.
Now to be sure…
IBM is a massive and multi-faceted company. So it’s necessarily difficult to analyze it comprehensively all in one article. But this blog post will identify some of the more pressing fundamental factors influencing IBM.
And of course, since IBM is such a popular blue chip company, I’m not the first one to try and analyze it. Others have have indicated a $255 price target based on a 5 year dividend discount model. Others point to shareholder friendly IBM management. While my personal favorite, Crossing Wall Street, says to buy IBM up to $197 per share.
IBM Fundamental Analysis – Financial Valuation:
IBM is a company at an interesting point. When you look at IBM’s financial stats, Revenue growth has slowed over the last 18 months, and this has been reflected in the stock price. But don’t despair…
This international technology company has continued to grow book value. And Mr. Market may have over-reacted. IBM is currently selling for about $200B in market cap and 11 times earnings, paying a 2.3% dividend.
As for the balance sheet, IBM has just shy of $19B in net assets and around $6B in net current assets, with most of it in cash and receivables.
While IBM doesn’t have any immediate balance sheet risk, most of the valuation comes from strong cash flows and (until recently) consistent revenue growth.
Last year’s full-year free cash flow was $13.35B, or $12.10 a share (and $14.94 EPS). So what does that mean?
With a basic intrinsic value calculation, using a conservative 0% growth rate, I determined that IBM is fairly priced around $200/share. That means at these prices, the market is not really pricing in any future revenue growth. If IBM can grow earnings over the next year or two, IBM’s fair value could easily move 10% higher or more.
So that lead’s us to the next question… can IBM grow earnings and shareholder value?
IBM Fundamental Analysis – Growth Narrative:
IBM is definitely a global leader and a world class organization with a track record of execution. But that doesn’t mean it’s smooth sailing ahead. IBM’s hardware business has languished and it’s divesting these less profitable business units. In the meantime IBM is trying to aggressively grow the cloud computing aspects of it’s company.
But that might be a bumpy road…
The cloud services space is competitive, with companies like Amazon (NASDAQ:AMZN), Oracle (NASDAQ:ORCL) and Microsoft (NASDQ:MSFT) also making plays for the corporate cloud. And arguably IBM still has somewhat of a fragmented cloud services offering. Plus, while IBM is more globally diversified it’s still struggling against declining sales in international growth markets.
Nonetheless, IBM management seems staunchly committed to growing earnings and delivering value to shareholders. They’ve even staked their bonuses on it!
From their January 2014 earnings release:
“We continued to drive strong results across much of our portfolio and again grew earnings per share in 2013. While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” said Ginni Rometty, IBM chairman, president and chief executive officer.
”As we enter 2014, we will continue to transform our business and invest aggressively in the areas that will drive growth and higher value. We remain on track toward our 2015 roadmap for operating EPS of at least $20, a step in our long-term strategy of industry leadership and continuous transformation.”
The second paragraph is especially illuminating. And if IBM management can capitalize on their plans, shareholders are sure to benefit. But again, nothing in the future is promised. Not even to IBM. So don’t stop reading yet.
Potential Risks to Investors Identified by IBM Stock Analysis:
While it’s tempting to paint an optimistic picture of IBM, it’s important to be aware of the risks as well. As we said above, the growth story is far from assured, – especially in international markets. And remember how competitive the cloud market is for IBM.
So although management’s track record provides some re-assurance, achievement of the publicly stated targets is not guaranteed. Rumor in the comment’s section of IBM’s Seeking Alpha page is that IBM has an old-school sales force that’s not going to be able to keep up (take that with a grain of salt). And luckily, at the current stock price this appears to be priced in.
Another common critique of IBM is that the company is using debt and selling assets to pay out dividends and bolster revenue. While investors are right to be skeptical, this “might” make sense. Maybe IBM management is taking on long term debt now, when interest rates are good. And so far, their asset sales have been limited to divesting low margin business units.
But skeptical investors are right to keep an eye on these developments. And it’s definitely something I’ll pay attention to going forward. And finally…
The biggest risk with an investment in IBM might be the opportunity cost. While IBM appears to be a reasonable investment, there might be other companies worthy of your capital. AAPL, MSFT and ORCL are also tempting investments at these prices.
I currently don’t own any shares of IBM. I might buy a small position. But this blog post is not any sort of recommendation to buy or sell IBM or anything else. What do you think about IBM as an investment opportunity?
And By The Way: If you want to get more stock market analysis feel free to download my ebook below. You’ll learn how I developed my market methodologies. And you’ll get weekly email updates sharing the best stock market tools and tips to help you become a more intelligent investor.