IBM Goes Head On Against Goldman Sachs In The Divisional Round

| About: International Business (IBM)

Summary

IBM is up 27.4% excluding dividends in the past year (up 30.1% including dividends).

Goldman is up 49.9% excluding dividends (up 51.4% including dividends).

Can IBM cause an upset in the brackets like J&J has already done?

In the divisional round of the Dow Industrials Playoffs we have # 6 seeded International Business Machines Corporation (NYSE:IBM) taking on # 3 seeded Goldman Sachs Group Inc. (NYSE:GS). Goldman engages in global investment banking, securities, and investment management, which provides a range of financial services to corporations, financial institutions, governments, and individuals while IBM is an information technology company which provides integrated solutions that leverage information technology and knowledge of business processes.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

IBM

17Oct16

3.29

3.23

19.2

19.0

GS

18Oct16

4.88

3.79

8.17

7.42

IBM is up 27.4% excluding dividends in the past year (up 30.1% including dividends) while Goldman is up 49.9% excluding dividends (up 51.4% including dividends), and the S&P 500 has gained 18.4% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will proceed to the conference finals where they will face either United Health (NYSE:UNH) or 3M (NYSE:MMM).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Goldman carries a 1-year forward-looking P/E ratio of 13.18 which is inexpensively priced for the future right now while IBM's 1-year forward-looking P/E ratio of 12.05 is also inexpensively priced. Game 1 goes to IBM by virtue of having the lower value.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Goldman is currently at 1.07 based on a 1-yr earnings growth of 18.2% while IBM's 1-yr PEG ratio is 4.37 based on a 1-yr earnings growth rate of 3.13%. Goldman takes Game Two to even the series at one game.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Goldman has a projected EPS growth rate of 18.2% while IBM sports a growth rate of 3.13%. Goldman puts a knockout punch to IBM in Game Three and wins two in a row against their foe.

Dividend Yield

Dividend yield is a no brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Goldman pays a dividend of 1.06% with a payout ratio of 21% of trailing 12-month earnings while IBM pays a dividend of 3.34% with a payout ratio of 46% of trailing 12-month earnings. IBM wins Game Four of the series by virtue of having the higher yield and evens the series at two games.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less assets. Goldman is showing an 0.6% efficiency rate on their assets while IBM is showing 10.2% efficiency. With this victory IBM is one game closer to advancing to the next round.

Return on Equity

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. Goldman proves its efficiency of managing its shareholders' equity to be 7.3% while IBM sports a value of 76.4%. By winning this game, IBM defeats Goldman and advances to the conference finals!

Conclusion

This seemed like a matchup that Goldman should have won but I guess IBM had something to prove. Goldman has run up a lot since the election in early November but it might just be time to temper expectations. I get the feeling that investors will be going overweight on IB M during the course of 2017 because it has been a laggard for quite some time. I'm excited to see IBM advance to the next round to play the winner between United Health and 3M.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Diversified Computer Systems
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here