IBM: A Hated Stock Produces Solid Numbers

| About: International Business (IBM)


IBM reported solid Q4 numbers though the market will focus on the lack of revenue growth and ongoing currency impacts.

IBM produced increased free cash flows despite the weak top line numbers.

The stock is attractively priced with several catalysts to finally give it a boost once the guidance gets out of the way.

After the close, IBM (NYSE:IBM) again proved why the stock is so hated. Despite the company generating more free cash flow during Q4 than the prior year, the stock trades at 52-week lows to $124 in after hours. In fact, IBM has already traded on a nearly straight-line down for the last seven months.

Click to enlarge

IBM is making slow progress in shifting to new areas such as mobile and business analytics, but the market isn't giving the company any credit. For the year, the growth areas were up 26% when excluding currency impacts to revenues. Strategic revenues hit $28.9 billion for the year setting the company up to quickly approach 50% of total revenues.

The market continues to focus on total revenues that were down 9% for Q4 when not adjusting for currency. The only problem with focusing on the top line is that IBM is repeatedly cutting weak margin businesses units.

The amazing part of the story is that IBM reported a Q4 EPS of $4.84 and free cash flow of $13.1 billion. Note that the EPS number is higher than the estimate some 90 days ago when the stock was trading higher at around $140.

With the free cash flow yield above 10% and the stock lower, one key I wanted to see this quarter was an increase in stock buybacks. If a company announces large stock buyback authorizations and then doesn't utilize them when the related stock plunges, the signal would be highly negative. In the case of IBM, the company slightly reduced the quarterly stock buyback rate with only $764 million spent during Q4.

IBM Chart

The amount did actually exceed the $132 million spent last Q4, but the spending was down from at least $1.1 billion spent in the prior quarters for 2015.

One caveat is that IBM spent $2.5 billion during the quarter on acquisitions. With a need to stabilize and improve revenue growth rates, the company will get a pass this quarter for providing a mix of investments in growth acquisitions and stock buybacks.

The numbers continue to support that IBM is a hated stock that investors should own. The stock pays a nearly 4% yield and the company is a cash flow machine. The stock will trade weak with guidance for 2016 EPS estimates of at least $13.50 after a roughly $1.3 billion hit from a strong dollar. The constant currency number equates to the analyst estimates of nearly $15.00, but the market will undoubtedly punish the stock for the currency issue.

The stock trades at only 8.5x meager EPS estimates ex-currency impact and even 9.2x the worst case of prolonged currency impacts.

With the large dividend and huge free cash flows to easily cover the dividend, the recommendation is to own the stock hated by the market for the lack of revenue growth and currency impacts.

Disclosure: I am/we are long IBM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.