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IBM: Valuation Scenarios Using The Dividend Discount Model
- After a sharp pullback to the $161 level, concerns regarding earnings forecasts are growing at IBM, with the recent abandonment of a 2015 forecast.
- Using the dividend discount model, I forecast a range of price targets for the company using 5%, 10%, 15% and 20% scenarios.
- I argue that investors should look for at least a 15% growth in DPS (dividends per share) and EPS (earnings per share) to justify buying at the current price.
- IBM is now dirt-cheap, priced at a fraction of its key competitors in technology.
- The history of the company shows it needs a strong entrepreneur to succeed.
- Activist investors can have a field day here, and you should join them.
IBM Fundamental And Algorithmic Analysis: Will Big Blue Bring Big-Time Blues?
- IBM revenue hasn't grown for the last 10 quarters; this Q3, the company experienced its worst earnings miss in recent history, and consequently, dropped its long-anticipated 2015 growth plan.
- Currently, IBM faces criticism: specifically, revenue stagnancy, poor international growth, inaccurate performance estimates, late transition to modern sectors, and stock buyback dependency have all been deemed problematic.
- Nevertheless, IBM still has strengths; analysts and investors feel its past rebounds, legendary current status, strong leadership, novel-sector growth, cutting-edge research, and recent partnerships make it worthwhile despite the drop.
- I Know First's algorithm predicts a bullish forecast for IBM in the 1-month and 3-month time frames.
Why Did Buffett Invest In IBM, And Should You Follow?
- Since the beginning of the year, IBM's share price has declined to a level that is below Buffett's purchase price of IBM shares in 2011.
- Buffett invested in IBM likely because the company has wide economic moats, a strong management team, increasing dividends and share buybacks and a good return on invested capital.
- Although IBM is likely undervalued, the company's businesses are too mature to have consistent revenue growth.
- IBM delivered disappointing Q3 financial results, recording a $3.4 billion after-tax loss on discontinued operations.
- Revenue and operating income from continuing operations declined 4% and 12%, respectively.
- Management responded to Q3 results with more financial engineering.
- With cloud computing encroaching on its mainframe business and a lack of innovation to spur growth, IBM's demise may not be over.
ModernGraham Annual Valuation Of International Business Machines
- IBM is not suitable for Defensive Investors or Enterprising Investors following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is undervalued at the present time.
- The market is implying 1.3% earnings growth over the next 7-10 years, considerably lower than the rate the company has seen in recent years.
- A bulls vs bears debate has raged on the pages of Seeking Alpha on IBM for the past month and more.
- Economics value added analysis looks at the profits accruing to the shareholders after subtracting the cost of capital.
- My economic value added analysis shows that IBM is adding over $12 billion in value per annum.
- A recent earnings miss has pushed IBM shares down significantly, but the stock appears to have bottomed-out.
- Investors can now buy IBM for less than what Warren Buffett paid.
- IBM continues to grow and innovate, which could result in new products or licensing revenues.
- IBM is also a solid pick for income investors thanks to an above average yield and a history of raising the payout.
Bulls Vs. Bears: A Survey Of Recent Seeking Alpha Articles On IBM
- In my article on IBM published last week I explained my rationale why IBM was a buy at this price.
- Since then, and before this month, much digital ink has been spilled on IBM. In fact 37 Seeking Alpha articles appeared in October alone on IBM.
- Herein I present a synopsis of IBM articles for the edification of readers and perhaps to make a little sense of this blizzard of opinions.
- I have divided these articles as mainly bullish, neutral or bearish and added my takeaway from the articles.
- Full disclosure: I myself am of the bovine persuasion with respect to IBM. Please don't mind if I poke a little at my ursine cousins.
- In a steadily inflating market with increasing amounts of volatility, IBM stands out for precisely the opposite reasons: It's been dropping in price and it's boring.
- The market is punishing IBM for "dead" revenues while earnings per share and dividends are steadily increasing.
- IBM is a tech industry outlier because it's lasted so long through decades of innovation, yet the short term market perceives it's different this time.
- Ultimately, the long term view of IBM is bright because it's rather dull and continues to lumber on cloaking the flood of cash returning to shareholders.
- It's easy to get emotional about any one "hot button" but overall IBM's been heading in the right direction, and should continue to do so.
- IBM’s continued acquisitions are being overlooked as a realistic detractor from free cash flows.
- Revenue issues are well known, but the depth of their problems is being hidden by capitalizing their R&D.
- I recommend avoiding IBM shares, not disregarding the value trap warnings and searching for reasons why IBM "could work.".
- IBM shares dropped more than 10% following its Q3 Earnings Announcement.
- Many investors are trying to determine if now is the time to buy the stock.
- My margin of safety analysis, based on the Benjamin Graham's definition, shows there is sufficient margin of safety at a price of $165 per share.
- IBM has a long history of navigating changing business environments.
- IBM is undervalued yet has some of the highest free cash flow in the market.
- New partnerships and oversold conditions mark a potentially good entry point for long-term investors.
- The lower stock price for IBM produces higher yields for investors.
- The $5 billion added to the stock buyback authorization is very positive.
- Investors need to focus more on the buyback yield than the concept of stock buybacks.
Despite The Recent Correction, IBM Shares Are Not Yet An Attractive Investment
- IBM shares now trade at less than 10 times forward earnings after a disappointing quarterly earnings announcement caused the shares to decline by more than 10%.
- However, IBM's competitive position has weakened in recent years and its balance sheet is becoming stretched after years of share buybacks.
- Despite an above average dividend, a DRAG analysis shows that IBM warrants a discounted earnings multiple and the shares are still overvalued by more than 15%.
- IBM's famous buyback program has inflated EPS over recent years.
- This strategy only works if there is FCF to support the buybacks.
- With dividends making up an increasingly large portion of IBM's FCF, buybacks are in serious jeopardy and with it, IBM's only source of EPS growth.
Wed, Jan. 22, 7:58 AM
- "Disappointing" is the theme as the sell-side comments on IBM's Q4 results from last night.
- "No near-term relief" is the title of Deutsche's note (and Deutsche is a bull on the stock). The company is likely to remain in the "penalty box" until it can show evidence of stability in hardware and improved execution in emerging markets and China.
- Investors will likely mull over whether IBM will need to reset the 2015 Roadmap this spring, says JPMorgan, expecting shares to be under pressure near-term and lowering the PT to $175.
- Credit Suisse reiterates its Sell rating and $160 price target on the weaker-than-expected numbers.
- Shares -3.2% premarket
Tue, Jan. 21, 6:27 PM
- IBM, which has already carried out a string of job cuts in recent quarters, expects to record a fresh $1B workforce rebalancing charge in Q1.
- The news follows a quarter in which a 5.5% Y/Y revenue drop led IBM's SG&A spend to rise to 21.6% of revenue from 20.2% a year earlier, and its R&D spend to rise to 5.7% of revenue from 5.4%.
- In addition to its huge buybacks, much attention is being given to the role an 11% tax rate (down from 16% in Q3) played in boosting IBM's earnings. Fund manager Mike Bergen estimates EPS would've been $0.80 lower if Big Blue's tax rate was at the 23% level expected by analysts.
- Software (+3% Y/Y) was a relative bright spot, thanks to healthy middleware (+15%) and database (+5%) sales. "Cloud revenue," a catch-all phrase covering a variety of hardware, software, and services sales, rose 69% Y/Y to $4.4B, boosted by the SoftLayer acquisition.
- 2013 free cash flow was $15B, less than net income of $18B. IBM ended Q4 with $11.1B in cash, and $12.2B in non-global financing debt. CEO Ginni Rometty insists IBM is on track to hit its 2015 EPS goal of "at least" $20.
- IBM -2.9% AH. More on IBM's Q4.
Tue, Jan. 21, 4:24 PM
- IBM has established 2014 EPS guidance of $18, slightly above a $17.97 consensus.
- Revenue continues to be pressured by nosediving hardware/chip sales, which declined 26% Y/Y in Q4 after dropping 17% in Q3 and 12% in Q2. Mainframes -37%, Power servers (UNIX-driven) -31%, x86 servers (reportedly on the block again) -16%, storage -13%, chips -33%. The numbers suggest share loss to H-P, Dell, TSMC, and others.
- Global Technology Services revenue -4%, same as Q3 and Q2. Global Business Services +1%. Services backlog is at $143B, +1% Q/Q and +2% Y/Y. Software +3% vs. +1%, global financing flat vs. +6%.
- $5.8B was spent on buybacks, up from $1.9B in Q3 and providing a big lift to EPS. Gross margin, which has been steadily rising in recent years, rose 30 bps Y/Y to 52.6%.
- Asia-Pac sales, pressured by NSA fallout, were soft again, declining 12% Y/Y; they dropped 15% in Q3. Americas fell 3%, and EMEA was up 1%. Sales to "growth markets" declined 5% after falling 9% in Q3.
- IBM -2.2% AH. CC at 4:30PM ET.
- Q4 results, PR
Tue, Jan. 21, 4:07 PM
Tue, Jan. 21, 12:10 AM
Mon, Jan. 20, 9:58 PM
- Lenovo (LNVGY, LNVGF) is in talks to buy IBM's low-end x86 server business, and a deal could be signed within weeks, Bloomberg reports.
- The two companies were said to be negotiating a deal for the division last year, but no agreement was reached on a price.
- Lenovo said today it’s in preliminary discussions on some kind of possible acquisition, but it did not identify the target or seller.
- Dell also may be among potential buyers, but it's not clear how seriously it is considering an acquisition.
Mon, Jan. 20, 5:35 PM
Mon, Jan. 20, 4:50 AM
- IBM (IBM) is again exploring a sale of its low-end x86 server business, the WSJ reports, with Dell a potential a suitor.
- IBM was in talks to sell the unit to Lenovo in Spring last year, but negotiations broke down over price. The Chinese company valued the operations at less than $2.5B.
- The latest report comes after sales of IBM's x86 servers fell 18% on year in Q3 in what was a tough overall year for the company's hardware division.
Fri, Jan. 17, 4:32 AM
- IBM (IBM) intends to invest over $1.2B on up to 15 new data centers across the world as part of its strategy to expand its cloud services.
- The scheme will bring the number of centers that IBM operates to 40 and will double the capacity of SoftLayer, which rents online storage space to companies. Since IBM acquired the Dallas-based firm for $2B last year, it has gained 2,400 new clients.
Thu, Jan. 9, 4:56 AM
- IBM (IBM) plans to invest over $1B to establish a new business unit for its Watson supercomputer, which the company apparently hopes will generate $10B within 10 years.
- The money will include $100M for a venture-capital fund to spark more activity at the Watson Developers Cloud after IBM opened it up to external programmers last year.
- The company plans to boost the headcount at IBM Watson Group to around 2,000, with many of the new recruits to be salespeople and consultants who will assist customers in working out how to use Watson.
- The news follows a report that IBM has had trouble making money from Watson - the initiative had brought in less than $100M as of October, due to various projects going awry or proving to be far more difficult than expected.
Wed, Jan. 8, 4:14 AM
- IBM (IBM) CEO Virginia "Ginni" Rometty reportedly hopes that the company's "Jeopardy" winning Watson supercomputer will generate $1B by 2018 and $10B within ten years.
- The problem is that Watson had brought in less than $100M as of October, as various projects have gone awry or been far more difficult than expected. A service with Citigroup that would recommend financial products to consumers still hasn't been launched.
- One great hope is healthcare, with IBM developing a version of Watson that can match cancer patients to clinical drug trials. Meanwhile, insurer WellPoint uses the machine to ensure that treatments meet company guidelines and a patient's insurance policy.
Dec. 19, 2013, 1:14 PM
- IBM (IBM +0.7%) has acquired Aspera, a developer of technology that speeds the transfer of extremely large files (think tens of GBs) over long distances. Terms are undisclosed. (PR)
- IBM notes Aspera's fasp transport tech helps address traditional challenges associated with long-distance file transfers over IP networks, such as latency and packet loss. It also points out the rapid growth seen in big data/analytics projects has resulted in more and more applications making use of giant files.
- Big Blue has been looking to grow storage software sales to offset storage hardware weakness (sales -10% Y/Y in Q3).
Dec. 18, 2013, 2:45 PM
- IBM (IBM +0.9%) is partnering with Chinese data center owner 21Vianet (VNET +6.9%) to offer its SmartCloud Enterprise+ cloud infrastructure (IaaS) platform to Chinese companies looking to set up private clouds. IBM will manage private clouds for clients while leveraging 21Vianet's facilities. (PRs: IBM, 21Vianet)
- The announcement comes shortly after IaaS giant Amazon Web Services announced it will begin offering public cloud services within China. Microsoft (Windows Azure) began offering them in China earlier in 2013, and Chinese e-commerce giant Alibaba (AliCloud) has been doing so since 2009. U.S. tech companies in general have seen their Chinese sales pressured by NSA-related fears.
- Big Blue significantly bolstered its IaaS presence earlier this year by acquiring SoftLayer. Synergy Research thinks IBM had a 7% Q3 IaaS share, good for second place behind Amazon's 35% share.
Dec. 12, 2013, 4:13 PM
- Beauty products giant Avon (AVP -1.3%) expects to take a $100M-$125M charge related to the failed rollout of an SAP-based (SAP -0.6%) order management software system. The WSJ states the system was "so burdensome and disruptive to Avon representatives' daily routine that they left in meaningful numbers."
- As Steve Rosenbush notes, Avon's decision, and the employee backlash that triggered it, shines a light on how corporate workers are increasingly demanding the business apps they use be as intuitive and user-friendly as the consumer apps they rely upon.
- This trend, which ties into the "consumerization" of IT, poses a challenge to traditional enterprise software giants such as SAP, Oracle (ORCL), and IBM, and often works to the benefit of enterprise cloud software providers whose offerings emphasize ease-of-use and flexibility over the richest possible feature set.
Dec. 11, 2013, 5:11 PM
- IT services demand "depends on what the economic climate is, and that has not been very encouraging," says Erich Clementi, head of IBM's Global Technology Services (GTS) unit. "Europe has shown signs of recovery. North America has been a little more uncertain.”
- The remarks comes less than two months after a big Q3 revenue miss blamed on a mixture of macro issues (particularly in emerging markets) and sales execution.
- Though IBM's services backlog was flat Q/Q and up 2% Y/Y in Q3 to $141B, GTS revenue fell 4% Y/Y and global business services revenue fell 5%. Together, the businesses accounted for 59% of IBM's revenue, and 51% of its op. profit.
Dec. 6, 2013, 6:41 PM
- IDC estimates server sales fell 3.7% Y/Y in Q3. That's a modest improvement from Q2's estimated 6.2% drop, but hardly a figure that will bring cheer to industry players. Gartner estimates revenue fell 2.1% in Q3 vs. 3.8% in Q2.
- The embrace by Web/cloud giants of home-grown servers produced by Asian contract manufacturers (ODMs) continues to upend the industry. IDC thinks sales of such servers rose 45% Y/Y, and now make up 6.5% of industry revenue. It estimates nearly 4/5 of these sales came from the U.S., largely from Google, Facebook, Amazon, and Rackspace.
- #1 H-P (HPQ), which recently reported encouraing enterprise hardware numbers, is assigned a 28.1% share (+150 bps Y/Y) by IDC. #2 IBM, whose total Q3 hardware sales fell 17% Y/Y, is given a 23.4% share (-430 bps).
- Newly-private Dell had a 16.2% share (-40 bps, a reversal from recent gains), Cisco (CSCO - still seeing strong UCS server demand) a 5% share (+170 bps), and Oracle (ORCL - hurt by SPARC/UNIX server weakness) a 4.1% share (-60 bps).
- In a positive for Intel (INTC), x86 servers took share once again, with sales rising 2.8% and making up 79% of industry revenue. Red Hat (RHT) is likely pleased to see Linux servers now make up 28% of industry revenue. Windows (MSFT) servers made up 50%, and UNIX servers just 11%.
- H-P is the leader in the x86 server market (32.3% share), as well as in the growing blade server (43.6%) and density-optimized server (30.7%) markets. There's a decent amount of overlap between the x86 and blade/density-optimized markets.
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International Business Machines Corp is an Information Technology (IT) company. It creates business value for clients and solves business problems through integrated solutions that leverage information technology & knowledge of business processes.
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