Dow-30 component International Business Machines (IBM – Free IBM Stock Report) is a worldwide supplier of technology and business services, software, and systems hardware. It is one of the few information technology companies with a continuous history dating back to the 19th century. Since that time, IBM has grown to great prominence, earning the nickname Big Blue, referring to the color of the mainframes it installed in the 1960s, and holding more patents than any other U.S.-based technology entity ever. Business was still humming along through the most recent recession, but there was a chink in the armor by the end of 2012. Revenues began to slide, and IBM had a hard time keeping up with the times. It lost some of its prominence, a hard pill to swallow for a company that boasts numerous Nobel Prize winners on its one-time employee roster, and management decided to go in some new directions to jumpstart creativity and sales going forward. The stock received a noticeable cut from the naysayers in the investment community and was stripped of its Wall Street darling status. Present day, some moves are paying off and some positivity has returned, but is this the right time for subscribers to get back on board? We will decipher just that using our recent Value Line report by analyst Theresa Brophy.
To see why the company has been struggling of late, we need to get to the crux of the problem and pinpoint where things started heading south. IBM is the poster child for big business computing, and the heyday of that phenomenon faded several years back. The company, which is tremendously bulky, has had trouble adapting to the cloud era, in which clients rent technology over the Internet instead of buying costly fixed items. A glance to the lower left of our page to the Quarterly Revenues box shows an ongoing decline. Indeed, revenues were already sliding from their 2011 high of $106 billion, to $99.8 billion in 2013, but that is not as severe as the dip posted last year to $81.7 billion. In recent years, IBM has focused on some outdated segments. Competitors have smelled blood in the water, and many have tried to undercut IBM in an attempt to win over certain projects. Too, companies like Amazon.com (AMZN) have simply had a superior offering in certain fragmented spaces of the tech realm. IBM has now done what most struggling behemoths do; costs are being cut at a rapid pace and forays into better performing subsectors are in full swing.
As Mrs. Brophy points out in the Commentary section in the middle of the Value Line page “IBM continues to make inroads in newer arenas, like cloud computing and analytics’’. Revenues here are climbing handsomely, but are not yet a large enough piece of the puzzle to get the sales needle moving all that much. Still, to the company’s credit, these were necessary maneuvers. Our forward-looking figures show the revenue slide has not yet cratered, an inflection point the investment community is surely trying to pinpoint.
A look right below the quarterly revenue figures to the Earnings Per Share box paints a similar picture, but with a rosier near-term outlook as far as a return to year-over-year growth is concerned. Spending to build out the capabilities needed to compete better on numerous new technological fronts, and a feverish acquisition spree should bite into the 2016 figure. However, for 2017, much of these costs may well be offset and the EPS tally should rise. That is good news, but some historical perspective is needed. The $12.75 a share we are looking for next year is still well shy of the record earnings $15.59 posted a couple of years back.
So if IBM is struggling so mightily why are so many investors still on board? That answer is multifaceted, but we will highlight two reasons. One is explained in the Business Blurb, in the middle of our page, just above the Commentary. This area is filled with pertinent information, including institutional ownership. We see that Berkshire Hathaway (BRK/B) has the largest stake (8.4%) of any investment group. Berkshire’s leader is the world-renowned Warren Buffett who has a legion of followers that mimic his investing patterns. If Mr. Buffett sees long-term value here, odds are it is present. Add to this the ownership pieces of other high-powered Wall Street firms, and institutional ownership totals more than 25% for a company that is in the doldrums. That tells us that several heavy hitters are IBM fans at these price points.
Secondly, heading back up to the Top Label, and over to the Dividend Yield portion of that line, we see that IBM’s yield as of this report is 3.7%. That metric is significantly higher than the Value Line median’s 2.2%. So, investors are getting a healthy income component for their patience. A more detailed view of the dividend payout is available in the lower left-hand corner of our page where the Quarterly Dividends Paid box is situated. The stipend this year should climb to the $5.50-a -share mark. Clearly, patient investors that value current income have an alluring play in IBM.
All this talk of a turnaround and entering into new categories is good, but we can also get down to brass tacks. Taking a look at the Top Label, we notice that the Recent Price on this report is $154.45 and the P/E Ratio is 12.5. Note, too, in the 2019-2021 column of the Array that the Average Relative P/E Ratio sits at 13.0 times earnings for that span. That tells us that even though this stock has been beaten down to levels well off its all-time highs, we still are not really getting that much of a bargain at this juncture. Therefore, we advise long-term-minded subscribers to wait for a more enticing entry point before getting involved here.