IBM And 3M Face Off In The Final Conference Championship Match

| About: International Business (IBM)
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Summary

IBM is up 28.3% excluding dividends in the past year (up 31% including dividends).

3M is up 28.7% excluding dividends (up 31.3% including dividends).

Who will win this battle of Dow titans that have been in the index since the 1970s?

In the conference finals of the Dow Industrials Playoffs, we have #7 seeded 3M Company (NYSE:MMM) taking on #6 seeded International Business Machines Corporation (NYSE:IBM). IBM is an information technology company which provides integrated solutions that leverage information technology and knowledge of business processes while 3M is a consumer products innovation company.

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

17 October 2016

3.29

3.23

19.2

19.0

MMM

25 October 2016

2.15

2.14

7.71

N/A

IBM is up 28.3% excluding dividends in the past year (up 31% including dividends) while 3M is up 28.7% excluding dividends (up 31.3% including dividends), and the S&P 500 has gained 20.8% 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 who will proceed to the Dow Industrials Super Bowl where they will face Verizon (NYSE:VZ).

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 12 months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing 12-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. IBM carries a one-year forward-looking P/E ratio of 12.09, which is inexpensively priced for the future right now while 3M's one-year forward-looking P/E ratio of 20.69 is fairly priced. Game One goes to IBM by virtue of having the lower value.

One-yr PEG

This metric is the trailing 12-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 who 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 one-year PEG ratio for IBM is currently at 5.99 based on a one-yr earnings growth rate of 2.27% while 3M's one-yr PEG ratio is 3.88 based on a one-yr earnings growth rate of 5.8%. 3M 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. IBM has a projected EPS growth rate of 2.27% while 3M sports a growth rate of 5.8%. 3M puts a knockout punch to IBM in Game Three and takes a one game lead.

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 12-month earnings. IBM pays a dividend of 3.36% with a payout ratio of 46% of trailing 12-month earnings while 3M pays a dividend of 2.49% with a payout ratio of 56% of trailing 12-month earnings. IBM wins Game Four of the series to even it at two games apiece.

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. IBM is showing a 10.2% efficiency rate on its assets while 3M is showing 14.8% efficiency. With this victory, 3M is just one game closer to advancing to the finals.

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 stockholders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. IBM proves its efficiency of managing its shareholders' equity to be 76.4% while 3M sports a value of 41.7%. By winning this game, IBM defeats 3M and evens the series at three games apiece now.

Return on Investment

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI 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 higher the ROI value the better. IBM came out swinging in the decisive game with an ROI of 23.4% while 3M was able to only produce a value of 22%. With this victory, IBM pulls off the win and advances to the championship game.

Conclusion

This seemed like a matchup that IBM should have won and it proved that it could in a tough battle of companies that have been in the index since the 1970s. I get the feeling that investors will be going overweight on IBM during the course of 2017 because it has been a laggard for quite some time. 3M, on the other hand, should benefit quite a bit from Trump's lower taxes which should boost the bottom line. I'm excited to see IBM advance to the championship match where it will face Verizon in a battle of technology titans.

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.