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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.
Mon, Oct. 20, 12:03 PM
- After badly missing Q3 EPS estimates (in spite of backing out the losses of its soon-to-be-sold chip unit), IBM (IBM -6.7%) guided on its Q3 CC for 2014 EPS from continuing ops. to be down 2%-4% Y/Y. That implies a range of $15.97-$16.30, soundly below a $17.87 consensus.
- Big Blue also says it took a $3.3B Q3 post-tax charge related to the chip business; the figure includes the $1.5B payment to Globalfoundries.
- During a CNBC interview, CEO Ginny Rometty suggested fresh layoffs are on tap. The company recorded a $1B workforce rebalancing charge back in Q1; its headcount was at 431K at the end of 2013.
- IBM's closely-watched services backlog fell 7% Y/Y in Q3 to $128B, a much sharper drop than Q2's 1%; the company declares it saw "insufficient" services productivity. Also worrying investors: Gross margin fell 90 bps to 49.2%, ending a long string of Y/Y gains.
- Other pressures on EPS: 1) The non-GAAP tax rate rose 80 bps Q/Q and 320 bps Y/Y to 20.8%. 2) Buybacks fell to $1.7B from Q2's $3.7B. 3) Opex for continuing ops rose 2% Y/Y, while revenue from continuing ops fell 4% (helps explain the job cut talk).
- Hardware revenue (excludes chips) -15% Y/Y; software -2%; global tech services -3%; global business services -2%; financing -3%. Within hardware: Mainframes -35%; Power systems -12%; x86 servers (just sold to Lenovo) -10%; storage -6%.
- Two strong points: "Cloud delivered as a service" revenue is up over 80% YTD ($3.1B/year run rate), and security revenue is up over 20% YTD.
- Americas revenue -2%; EMEA -2%; Asia-Pac -9%. "Growth markets" -6%, with BRIC countries down 7%.
- Free cash flow ($2.2B) was once more well below net income ($3.7B). IBM ended Q3 with $9.6B in cash, and $17.1B in non-financing debt.
- Q3 results, details, PR
Mon, Oct. 20, 7:30 AM
- "We are disappointed in our performance," says CEO Ginni Rometty. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."
- Non-GAAP operating income from continuing operations (excludes semiconductor business whose acquisition by Globalfoundries was announced today) of $3.7B is off 18%; operating EPS of $3.68 is lower by 10%. Gross profit margin of 49.2% down 90 basis points.
- Guidance will be discussed further in the 8AM ET conference call, but the presentation slides say the company no longer expects to deliver at least $20 in operating EPS in 2015.
- More from Rometty: "We again performed well in our strategic growth areas cloud, data and analytics, security, social and mobile - where we continue to shift our business. We will accelerate this transformation."
- IBM -8% premarket
- Previously: International Business Machines misses on revenue
Mon, Oct. 20, 7:09 AM
- International Business Machines (NYSE:IBM): Q3 EPS of $3.68 misses by $0.64.
- Revenue of $22.4B (-4.0% Y/Y) misses by $970M.
- Shares +1% PM.
- Press Release
- Previously: Globalfoundries to take control of IBM's semiconductor operations
Sun, Oct. 19, 5:30 PM
Thu, Aug. 7, 7:12 PM
- Following its FQ1 beat, CSC is still targeting FY15 (ends March' 15) EPS from continuing ops of $4.35-$4.55; consensus is at $4.49.
- Global business services revenue -3% Y/Y in FQ1 to $1.09B, with $1.2B in contract awards Global infrastructure services +1% to $1.13B, with $1.2B in contract awards. North American public sector -3% to $1.02B, with only $300M in contract awards.
- Op. margin fell to 7.7% from 8.3% a year ago. Free cash flow was $70M, below net income of $146M. $148M was spent on buybacks.
- CSC has also announced it's expanding an existing partnership with IBM, with a focus on providing new cloud, mobile, and big data/analytics offerings. Among other things, CSC will create a "center of excellence" for IBM offerings, and integrate its ServiceMesh Agility cloud management platform with Big Blue's SoftLayer cloud infrastructure (IaaS) platform.
- FQ1 results, PR
Fri, Jul. 18, 5:24 PM
- IBM's (IBM - unchanged) Q2 hardware sales (-11% Y/Y vs. -23% in Q1,) "delivered meaningful upside" to Cantor's estimates, says analyst Brian White, while reiterating a Buy. Favorable comps and healthy mainframe/storage demand allowed the hardware unit to grow 39% Q/Q, or more than twice historical seasonal growth.
- White also thinks IBM's Chinese revenue (-11%, hurt by NSA issues) has bottomed out. On the CC (transcript), IBM said it saw "a pretty good sequential improvement" in China and India, though it added other parts of Asia-Pac remained weak.
- Citi's Jim Suva is less enthusiastic than White: He observes a one-time asset gain boosted EPS by $0.10, that Global Business Services outsourcing (-9%) remains weak due to price pressure and contract negotiations, and that services signings are down 33% (partly due to tough comps). He also notes mainframe growth isn't expected to continue.
- Credit Suisse's Kulbinder Garcha, meanwhile, has doubts about "the quality" of IBM's forecast for $20 in 2015 EPS, given "results continue to be driven less by revenue growth and more by non-operational items."
- Some bright spots: 1) With the help of SoftLayer, IBM's "cloud delivered as a service" revenue is now on a $2.8B run rate. That's roughly equal to 3% of total revenue. 2) Ahead of the Apple deal, "mobile revenue" (a nebulous term) is up over 100% YTD.
- Prior IBM earnings coverage.
Thu, Jul. 17, 5:00 PM
- With the help of easier comps, IBM's hardware/chip sales fell 11% Y/Y in Q2, a notable improvement from Q1's 23% and Q4's 26%. Mainframe sales -1%, Power servers (UNIX-focused) -28%, x86 servers (due to be sold to Lenovo) -3%, storage -12%, chips (reportedly on the block) -18%.
- Global Technology Services -1% vs. -3% in Q1. Global Business Services -2% vs. flat Q1 growth. The services backlog stood at $136B, -1% Y/Y after backing out the sale of IBM's customer care outsourcing ops to Synnex.
- Software revenue +1% vs. +2%. OS sales (hurt by server weakness) fell 13%, while key branded middleware rose 1%. Global financing +4% vs. +3%.
- Big Blue spent $3.7B on buybacks, less than the whopping $8.2B spent in Q1. Gross margin rose 40 bps Y/Y to 49.1%. Q2 free cash flow was $3B, less than net income of $4.3B (continuing a recent trend).
- Americas revenue -1%, EMEA +1%, Asia-Pac (weak in recent quarters) -9%. "Growth markets" -7%, and BRIC countries -2%.
- Tax rate was 20%, even with Q1 but down from 22% a year ago. IBM ended Q2 with $9.7B in cash, and $17.1B in non-Global Financing debt.
- IBM now -1.1% AH. Q2 results, PR.
Thu, Jul. 17, 4:10 PM| 15 Comments
Wed, Jul. 16, 5:35 PM
Wed, Apr. 16, 4:31 PM
- IBM is reiterating full-year guidance for EPS of at least $18 (consensus is at $17.84).
- Big Blue spent an eye-popping $8.2B on buybacks in Q1, up from $5.8B in Q4. That allowed EPS to nearly meet estimates in spite of a $450M revenue miss. On the other hand, IBM's tax rate (the subject of recent scrutiny) rose to 20% from Q4's 11% and Q3's 16%. A 90 bps Y/Y increase in gross margin to 47.6% also boosted EPS.
- Hardware/chip sales remain bleak: They fell 23% Y/Y vs. 26% in Q4. Software +2% vs. +3%, global technology services -3% vs. -4%, global business services flat vs. +1%, global financing +3% vs. flat. The services backlog stood at $138B at quarter's end, down $5B Q/Q and $3B Y/Y.
- Asia-Pac remains a weak spot: Sales fell 12% Y/Y. Americas were down 4%, and EMEA up 4%. "Growth markets" and BRIC sales each fell 11%.
- Q1 free cash flow was just $0.6B, well below net income of $2.6B. Cash on hand fell to $9.7B from $11.1B at the end of Q4, and non-global financing debt rose to $15.7B from $12.2B.
- Q1 results, PR
Wed, Apr. 16, 4:12 PM| 19 Comments
Wed, Apr. 16, 12:10 AM
Tue, Apr. 15, 5:35 PM
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
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