Regular readers here probably know I have given up on IBM (NYSE:IBM).
When I warned in 2011 that incoming CEO Virginia Rometty was just a nice marketing person who would lead to trouble, the story was so controversial it could only run as an Instablog. How could you not call me crazy? Two years ago IBM was a $200/share stock. Warren Buffett loved it.
On Friday morning, IBM started trade at about $122. The total market cap is $118 billion, meaning companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) or Google (NASDAQ:GOOG) (NASDAQ:GOOGL) could easily acquire it. I even suggested that the head of Red Hat (NYSE:RHT), a much smaller company, be brought on to take it over. I warned against buying it in October, when the price was $140.
But almost every falling knife gets interesting at some point. IBM today is interesting.
This is a technology company selling for just 1.5 times revenues, 9 times last year's earnings. It has a dividend yielding 4.23% at current prices. This is not an oil stock, and it's not a dry hole. This is a real company with hundreds of thousands of employees around the world.
What IBM is trying to do, now, is buy its way out of trouble. While most managements have been snowbound this January, or snow-blinded by the falling stock market, IBM has been buying. It has picked up UStream to get into video, calling it a $105 billion opportunity. Its PwC unit picked up Outbox to drive cloud adoption in Europe. IBM is partnering with CSC (CSC) on hybrid cloud, tapping government markets. As smaller cloud start-ups grow cash poor in the current environment IBM is ready to snap up some of the best.
This is the difference between IBM and such troubled rivals as HP Enterprise (NYSE:HPE) and Yahoo (YHOO). IBM still has cash, over $7.6 billion as of the end of the year. It has a board willing to spend, one that has not yet given up. It is still profitable, albeit smaller than before, bringing roughly $1 in every $5 of revenue - $4.46 billion out of $22 billion in the December quarter - to the net income line. Cloud is still an environment with lots of nimble start-ups in it, companies that can be bought and change the game.
This means that IBM can still spend its way into the cloud market. The company is trying to do just that. During 2015 this former cash flow monster brought in $16.8 billion of operating cash flow and sent all of it, and more, out the door, a net change in cash position of negative $2.24 billion.
Cynics - and I have been accused of cynicism in the past - may compare this with Germany's last offensive in the Battle of the Bulge. But there's life in this old dog yet, and the stock is dirt cheap. If you're a dividend investor with some risk appetite, I'd consider buying this stock.
Disclosure: I am/we are long AAPL, GOOGL, MSFT.
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.