IBM: Too High To Buy?

| About: International Business (IBM)

International Business Machines (NYSE:IBM) is as valuable a company as it ever has been in its history.

On March 15, shares of IBM hit an all-time high of $215.90. At its current price of just under $211, the world's largest provider of computer services has a market capitalization of $239.7 billion.

Given this fact, investors might think it's too late to buy stock in one of the most stable companies. And if you look at the lack of revenue growth over the last few years, it makes a stronger case that IBM can't go much higher in value.

But you could also conclude the opposite, given its steadily growing profits and the company's relatively low price-to-earnings ratio of 14.80. And when compared with many of its peers, IBM still has ample room to grow. Its market cap is about 2.2 times annual sales, lower than Apple's 2.73, Microsoft's 3.12 and Google's 4.95.

Whether it's too late for now to buy stock in IBM is about the only question regarding its worthiness as an investment.

Recent History is Solid

Since November 2008 shares have more than doubled in value and the dividend has been increasing at regular intervals. The company's annual payout was $3.40 a share, yielding 1.6%. That accounted for only 23% of earnings. Last year, the company spent $3.8 billion on dividends and $10.5 billion on buybacks.

IBM has paid dividends since 1913, and has increased dividends for 17 years in a row. Over the past decade, it has delivered an annualized total return of 11% to its shareholders.

The company has propelled its stock price by boosting earnings per share, divesting underperforming units and moving into higher-margin software businesses such as data analysis. IBM has said it will deliver at least $20 in earnings per share in 2015, compared with $15.25 last year. It also has set aside $50 billion for share repurchases and $20 billion for dividends between the end of 2010 and 2015.

IBM is an information technology company. It operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology and Global Financing. GTS provides IT infrastructure services and business process services. GBS provides professional services and application management services. Software consists of middleware and operating systems software. Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. Global Financing invests in financing assets, leverages with debt and manages the associated risks.

2012 Fourth-Quarter and Full-Year Earnings

IBM's last earnings release in late January was positive. Fourth-quarter earnings per share totaled $5.13, compared with $4.62 per share in the fourth quarter of 2011, an increase of 11 percent. Fourth-quarter net income was $5.8 billion compared with $5.5 billion in the fourth quarter of 2011, an increase of 6 percent. Revenue for the quarter was essentially flat at $29.3 billion, the third consecutive quarter of declining sales. All but one of IBM's business units experienced year-over-year declining revenues, with the software segment growing 3%, however there were subsections of the company that performed quite well. Revenue from analytics increased 13%, its Smarter Planet initiative grew revenue by more than 25%, while cloud systems revenue jumped 80%

Net income for the year was $16.6 billion compared with $15.9 billion in the prior year, an increase of 5 percent. Earnings per share were $14.37 compared with $13.06 in 2011, an increase of 10 percent. Overall revenues fell 2% to $104.5 billion, while free cash flow totaled $18.2 billion, up $1.6 billion from the year before.

The company's total gross profit margin was 48.1% in 2012 compared with 46.9 percent in 2011. Overall gross profit margins improved year over year for the ninth consecutive year. Total operating gross profit margin was 48.7 percent in the 2012 period compared with 47.2 percent in the 2011 period.

Focus on Innovation

Despite its size, IBM remains focused on innovation, spending over $6 billion annually on R&D in recent years. IBM was awarded 6,478 patents in 2012, more than any other company in the world; a title it has held for 20 consecutive years now.

No company has built as many cloud systems, no company brings in more revenue from cloud, and no company is as focused on enterprise cloud computing as IBM. Just as IBM spent the 1990s and 2000s quietly unifying its operating system strategy under Linux, it has spent most of this decade building a complete cloud stack -- infrastructure, platforms, software applications and services that, for most big enterprises, make it the only choice in the field.

One of the most recent outcomes of IBM's research and development was the February launch of IBM MobileFirst, a package that combines security, analytics and app development software, with cloud-based services and mobile expertise. Using IBM MobileFirst solutions, businesses can now streamline everything from the management of employee mobile devices, to the creation of a new mobile commerce app that will transform their entire business model.

The company has managed to deliver a 14.20% average increase in annual earnings per share since 2003. Analysts expect IBM to earn $16.63 per share in 2013 and $18.45 per share in 2014. IBM said that it expects to deliver full-year 2013 earnings per share of at least $15.53.

In the last year, IBM achieved a return on equity of 88%, return on investments of 38.7% and return on assets of 13.9%. Its balance sheet includes $10.4 billion in cash and long-term debt of $24 billion. Its long-term debt-to-equity ratio is a little high at 1.28.

Most analysts seem to believe that IBM may be valued high enough that it's risky to jump in now, but it's also not necessarily a good time to cut losses. Fourteen of the company's 26 analysts rate the stock a hold, while 11 have it as a buy or strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.