Heading into fourth quarter earnings, all of the "bad news" may be priced into the share price of International Business Machines Corp. (IBM); I don't think the market is expecting much in the way of "good news;" so "not as bad as feared" could be a positive catalyst. Guidance for 2014 will move the market, but expectations are low. There is hope for a near-term rebound.
The buyzone remains at $160-$182 per share, which is about the current share price. From this level, I would need the share price to rise to my intrinsic value estimate of $232.44 per share to make the investment worth the risk of capital. The increase in the share price to the $230 level would likely be a 2015 story, if management can revive net revenue growth.
I think of an investment in IBM in three parts: the business, valuation, and macroeconomy. I think the business is facing headwinds in hardware and global services. The valuation has room for upside. And the macroeconomy is bullish on the global economic expansion. I think the global economic expansion is priced into the valuation, which leaves the underlying business. For the share price to converge to my intrinsic value estimate, I think we need to see "upside surprises," and I am not confident this will happen near term. Thus, I'm cautiously bullish on IBM.
- On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX will acquire the company's worldwide customer care business process outsourcing services business for $505 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $75 million in SYNNEX stock, which represents less than 5 percent equity ownership in SYNNEX.
- On October 2, 2013, the company completed the acquisition of Xtify, Inc., a leading provider of cloud-based mobile messaging tools that help organizations improve mobile sales, drive in-store traffic, and engage customers with personalized offers.
- On October 25, 2013, the company completed the acquisition of The Now Factory, a privately held company based in Dublin, Ireland. The Now Factory is a provider of analytics software that helps communications service providers deliver better customer experiences and drive new revenue opportunities.
- IBM received a patent for a breakthrough data encryption technique that is expected to further data privacy and strengthen cloud computing security. (So, I'm awaiting word of NSA approval.)
- Gartner named IBM Interactive a Leader in for Global Digital Marketing Agencies.
- Stanley Druckenmiller thinks IBM is a "high probability short" as competition from Amazon Web Services intensifies.
- IBM acquired Aspera, a developer of technology that speeds the transfer of extremely large files over long distances, which is good for Big Data.
International Business Machines Corp is an Information Technology company. It creates business value for clients and solves business problems through integrated solutions that leverage information technology and knowledge of business processes.
The company's liquidity has been relatively stable, but there has been an increase in the current ratio. On the other hand, leverage, long-term debt-to-equity, increased to 1.43, but financial leverage decreased to 5.93. Net debt is $25.95 billion, and the market capitalization is $201 billion.
The inventory turnover ratio has been relatively stable as revenues declined. Inventory turnover declined from 5.34 in the third quarter of 2011 to 4.87 in Q3 '12. Turnover increased to 5.06 in Q3 '13. There was an improvement in inventory management in Q3.
Working capital turnover ("WCT") has been pretty much flat. During the third quarter of 2011, WCT was 3.18 and declined to 2.89 during the third quarter of 2012. WCT was 3.12 in the third quarter of 2013. Management did a good job of managing working capital during this year's third quarter.
The shift in mix to higher margin solutions is evident in Q3 2013 profitability. The operating margin and net income margin expanded. But the gross margin was flat. I expect margin expansion to continue.
Management expects results from China to adversely impact the results of operations during the next few quarters. But they are calling for 2013 diluted EPS of at least $15.01 while I expect basic EPS of at least $14.40. My estimates are usually conservative. GAAP 2012 diluted EPS was $14.37. I'm still looking for net revenue between $98B and $100B for 2013.
IBM found support at the $173 level, which suggests the share price could be set to rebound. The trade, from this perspective, is to get long on a minor correction with a trailing stop loss starting at the $170 level. The share price should rebound to at least $200.
I am maintaining the intrinsic value of $232.44, but it may be revised lower following fourth quarter results and management's 2014 guidance. It is unlikely that the estimate will be revised higher.