- IBM has a new CEO - finally.
- IBM's acquisition of Red Hat was the right thing to do.
- IBM's ever growing 5% plus dividend is another plus.
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On November 5, 2018 I wrote an article on IBM (NYSE:IBM) called "No, IBM Did Not Overpay For Red Hat" and I recommended purchase. The price on that date was about $123. The price then went up and exactly 15 months later on February 5, 2020 the price peaked at $156. Add in the $7 in dividends over that period and we had a nice gain of $40 or 32% over the 15 months.
And then the world came to an end and IBM dropped briefly below $100. It now stands at $122, almost exactly the same as the November 5, 2018 price.
Here are 5 reasons to buy IBM again.
1. There's a new sheriff in town - CEO Arvind Krishna
On January 30, 2020 IBM's board announced that long-time CEO Ginni Rometty was stepping down and would be replaced by Krishna on April 6.
Krishna is currently senior VP for Cloud and Cognitive Software.
Equally as important the board also announced that former Red Hat CEO James Whitehurst would be named President.
Both these guys are leading-edge executives with huge expertise in leading-edge cloud and Linux technology. Exactly the right people for the job.
Rometty, on the other hand, was about as dynamic as an amoeba after a big lunch. She saw her mandate as holding IBM together while it spent years trying to reclaim some semblance of technical expertise. Well, if putting these two people in charge was the result, then that is a good thing. But boy, am I glad to see her go. I only wish her sterling 40-year IBM career had been a sterling 35 years instead.
2. New acquisition Red Hat will add expertise and sales to IBM's current product line including cloud
As I explained in the article referenced above, buying Red Hat was exactly the right thing to do. It helps legitimize IBM's technical bona fides and provides a high-margin product that can grow the business including the consulting business. Not only that but IBM now employs all the high-tech people from Red Hat without any recruiting effort including IBM's new President James Whitehurst.
Red Hat is already showing growth with 24% revenue growth in the 4th quarter. And they are boosting IBM's cloud business too.
No reason to think that will not continue over the coming years. So sit back and watch your divvy grow while these new, young technocrats drive the share price higher.
Per IBM CFO Jim Kavanaugh:
"We've now increased our dividend per share for 24 consecutive years, and we remain committed to growing our dividend."
And, oh, did I mention $12.5 billion in FCF (free cash flow) for 2020. That's about $14 per share of FCF or less than 9x the current stock price. Note that FCF exceeds the EPS of $13.35.
IBM has been making mainframe computer systems since the 1950's about as long as Sugar Frosted Flakes. Talk about brand management.
The latest series is called the Z-15 introduced last November. IBM does not break out Z related revenue but a good guess would be at least a very high-margin $5 billion a year. And with Red Hat now in the stable, it's probably growing from there. That's because Z Series is famous for running 1000's of VM's (Virtual Machines) at the same time. In many installations, Red Hat will be running on the majority of those VM's thus adding high-margin revenue to the Z-Series.
I have a friend who is high-up in the IT department of a very large financial institution and I asked him how long his company would continue to use IBM mainframes. He said at least 15 years and maybe forever.
Here's a quote from a user:
"When we talk to clients, certainly security and trust are the two biggest things. (With IBM Z) there has been absolutely no security breach over the past 15 years."
I don't think any other hardware manufacturer can say that.
5. 25 years of patent dominance says something about IBM's research capabilities
In the high-tech world, research on future products is a critical resource. Leading the world in patents for 25 straight years is a sign IBM knows this better than most. With new leadership, I think this vital asset will be used to grow revenue from new technologies and licensing going forward.
10 US Companies Granted The Most Patents In 2019
|Rank||Company||Number of US patents granted in 2019|
|1||International Business Machines Corp. (IBM)||9,262|
|2||Samsung Electronics Co., Ltd. (OTCPK:SSNLF)||6,469|
|3||Canon Inc. (CAJ)||3,548|
|4||Microsoft Technology Licensing LLC (MSFT)||3,081|
|5||Intel Corp. (INTC)||3,020|
|6||LG Electronics Inc. (OTC:LGEAF)||2,805|
|7||Apple Inc. (AAPL)||2,490|
|8||Ford Global Technologies LLC (F)||2,468|
|9||Amazon Technologies, Inc. (AMZN)||2,427|
|10||Huawei Technologies Co., Ltd.||2,418|
How I am playing it
I bought shares today and am looking for at least $150 within 12 months. If it doesn't reach that price point, I will look at facts on the ground and decide whether to hold or sell.
I am planning on IBM being a medium-term hold somewhere between 12-18 months unless facts on the ground change considerably during that time period.
Risks, alarm bells and red flags
In this volatile market, all investment decisions deserve extra caution. There is nothing wrong with being in cash at this point in time until the market shows less volatility and more firm direction.
In addition, there could be a recession coming or even a depression according to several economists.
"Economic data in the near future will be not just bad, but unrecognizable," Credit Suisse economists led by James Sweeney wrote last week. "Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold... There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming."
Caution is the investment word of the day.
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Analyst’s Disclosure: I am/we are long IBM. 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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