A Few Reasons Why IBM Can Recover From A Flat Performance

| About: International Business (IBM)


IBM shares have remained relatively flat this year, but the company is making positive moves to turn the business around.

IBM's focus on accelerating cloud deployments with products such as BlueMix and heavy investments in products for the future will drive growth.

IBM's divestment of non-core assets and an impressive valuation are more reasons to consider this stock for the long run.

In 2014, shares of IBM (NYSE:IBM) have remained relatively flat, as the company is engaged in a transition in its business. As a result, IBM is seeing some short-term pains. For instance, in the second quarter, the company's revenue was down 2.2% from the year-ago quarter. However, its net income increased an impressive 28%. So, IBM seems to be doing well to overcome short-term issues, and it is making good moves to improve its long-term prospects.

IBM's smart moves

IBM is undertaking several strategic moves, such as bolstering its SoftLayer cloud hubs business, focusing on its new platform-as-a-service to gear up deployment of hybrid clouds, and accelerating its mobile business. In addition, to focus on the markets outlined above, IBM recently announced the divestment of its customer care business, and it will also sell its server business to Lenovo (OTCPK:LNVGY).

Moves such as these will allow IBM to right-size its business in accordance with the present market scenario, where cloud adoption is increasing rapidly. IBM is now investing in the right areas. For example, it invested $1.2 billion in its SoftLayer cloud hubs business, and also launched BlueMix, its new platform-as-a-service. These initiatives will enhance its capabilities in the deployment of hybrid clouds.

Additionally, the company has announced new Big Data capabilities on its IBM cloud marketplace. These new cloud services will help enterprises with added interactive content, which will allow them to deliver better results and improve decision-making processes. Also, enterprises now will be able to easily access its new Big Data services, as they will be available across devices.

Building the ecosystem

Recently, IBM acquired Aspera and Cloudant, which should increase its competence in the Big Data and cloud markets. Also, the company is looking to accelerate its growth by building its ecosystem around its OpenPOWER platform. Moreover, IBM will invest $1 billion in its Watson supercomputer that should bring cognitive capabilities to the enterprise.

Hence, IBM is moving into new areas to power its growth. Further, IBM is now planning to establish key cloud centers in key geographies by doubling its SoftLayer centers, with 40 cloud datacenters in more than 15 countries. Also, its front office transformation has been impressive, as IDC has ranked IBM as the number one in overall business consulting and cloud professional services. Also, its mobile consulting services have been ranked number one by Forrester, indicating the strength of its product portfolio.

IBM has broadened its mobile software product portfolio with MobileFirst, which will allow clients to leverage the power of mobile devices for the enterprise. The company expects its mobile software segment to pick up momentum with the acquisition of Cloudant, which is aimed at allowing developers to create next-generation mobile and web applications intuitively.

However, IBM's hardware business is under pressure, as it declined approximately 23% in the first quarter of the year. The company is finding it difficult to gain traction in its power, storage and System x hardware solutions. Nevertheless, IBM is trying to improve its standing in this area by launching new products such as Power8, which are expected to boost its storage offerings.

Cheap valuation

IBM's short-term pains have made the stock cheap. It trades at a forward P/E of 9.6, as against a trailing P/E of 13. Also, its profit margin and operating margin are strong at 17% and 20.83%, respectively. Another impressive fact about IBM is that it provides a handsome dividend yield of 2.40%, and there is scope for improvement in this metric, as the payout ratio is just 25%.

IBM has generated operating cash flow of $17 billion in the last one year, along with levered free cash flow of $9.34 billion, which indicates that the company can hike its dividend without much difficulty. Hence, even though IBM is seeing short-term pains, its long-term prospects remain intact.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.