Dow Industrials Super Bowl: IBM Vs. Verizon

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Includes: IBM, VZ
by: Abba's Aces

Summary

It's finally here, the 2017 Dow Industrials Super Bowl!

IBM is up 39.7% excluding dividends in the past year (up 42.4% including dividends).

Verizon is down 1.8% excluding dividends (up 2.4% including dividends).

In the Championship Game of the Down Industrials Super Bowl we have two titans of American industry hailing from the technology sector facing off for the trophy. We have#8 seeded Verizon Communications Inc. (NYSE: VZ) 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 that destroyed Wal-Mart (NYSE:WMT) in a sweep while beating Goldman Sachs (NYSE:GS) in the second round and finishing off the # 7 seeded 3M in seven games.

Verizon is a holding company which engages in the provision of broadband and communication services and beat Exxon (NYSE:XOM) in six games during the first round while they swept Caterpillar (NYSE:CAT) followed by beating J&J (NYSE:JNJ) in a seven game series.

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

19Jan17

5.01

4.88

21.8

21.64

VZ

24Jan17

0.86

0.89

32.34

32.09

IBM is up 39.7% excluding dividends in the past year (up 42.4% including dividends) while Verizon is down 1.8% excluding dividends (up 2.4% including dividends), and the S&P 500 has gained 17.2% 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 of the Dow Industrials Super Bowl.

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. IBM carries a 1-year forward-looking P/E ratio of 12.41 which is inexpensively priced for the future right now while Verizon's 1-year forward-looking P/E ratio of 12.33 is also inexpensively priced but less expensive than IBM. Game 1 goes to Verizon.

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 former capital projects manager that performed 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 IBM is currently at 5.2 based on a 1-yr earnings growth of 2.7% while Verizon's 1-yr PEG ratio is 4.5 based on a 1-yr earnings growth rate of 3.43%. Verizon takes Game Two away from IBM in a very tightly contested matchup takes a two game lead in the series.

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 2.7% while Verizon sports a growth rate of 3.43%. Verizon takes game three to take a three game lead in the series.

Dividend Yield

Dividend yield is a no brainer; it must be had in a dividend 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. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. 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. IBM pays a dividend of 3.19% while Verizon pays a dividend of 4.68%. Verizon wrestles away game four of the series to sweep IBM and capture the trophy.

Conclusion

Although IBM lost to Verizon in the series, IBM is still a great company for a portfolio. After seeing who the final two contestants were in the championship game, it is fair to say that companies focused primarily in the tech sector are the investments which worked for 2016, and I continue to believe will work in 2017. IBM definitely has had some hiccups over the past couple of years with declining revenues but Verizon was the better team for 2016.

Verizon on the other hand has been dishing out great dividends for investors for quite some time now and will probably continue to do so going into the future. There were a lot of fans rooting for Verizon during this series. Now that Verizon has won the third Super Bowl, the stock will be added to the Portfolio of 12 in the speculation portion and not rotated out during any quarterly adjustment this coming year (barring anything catastrophic).

The one thing Verizon has in common with the previous winners, KLA-Tencor (NASDAQ:KLAC) and Home Depot, is that all the teams advanced from the wild-card round (KLAC was the #6 seed and Home Depot was #5). KLAC went on to perform very well during 2014 as Home Depot did in 2015. We shall see if the trend repeats itself for 2017. I will continue the tradition this year with Verizon by purchasing small batches almost every week and hope to profit from it as I did with KLAC and Home Depot. I'll leave you with this table until next year's Super Bowl. Note that no playoffs were played in 2016 due to a strike, just kidding, I didn't have time to do one last year.

Portfolio Super Bowl

Year

Matchup

Winner Playoff Record

1-YR Winner Stock Appreciation (incl. dividends)

S&P Return

1

2014

KLA-Tencor (4) - JPMorgan (1)

16-1

25.4%

11.6

2

2015

Home Depot (4) - Union Pacific (1)

16-5

18.5%

-6.9

3

2017

Verizon (4) - IBM (0)

16-5

TBD

TBD

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.

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