IBM: Still Undervalued, And Sending A Buy Signal

| About: International Business (IBM)
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Prior to its 2nd Quarter earnings release on 7/18/12, International Business Machines, (NYSE:IBM), had mostly gotten little respect from the market since the April highs, falling over 10%, while the S&P was down a bit over 3%. However, even with its big 3.77% post-earnings release gain on Thursday, IBM is still trailing the S&P since the June 4th lows:

IBM first crossed above the oversold line on its stochastic chart on Wednesday, 7/18/12, gaining 2.5% before its after-hours earnings release. This type of price move is seen as a buy signal by chartists:


In its Q2 2012 earnings release this week, IBM raised the bottom end of its 2012 forecast, to $15.10, from $15.00. Big Blue also reported GAAP EPS growth of 11%. Revenue fell 3%, or 1%, excluding currency exchange losses. (Currency exchange losses will most likely be cutting into many U.S. multinational firms' 2nd quarter earnings, thanks to a strong dollar.)

Although it doesn't appear undervalued on a PEG basis for 2012 or 2013, IBM does look undervalued longer term, on a discounted future earnings stream basis. Using a risk-adjusted discount rate of 8.30% and a 5-year growth rate of 9.00%, (which is lower than the current 5-year consensus growth rate of 10.99%), indicates a share value of $311.78.

Industry Valuation Comps: IBM's Price/Sales and Price/Free Cash Flow look cheap vs. its peers, but, like many industry leaders, it often commands a higher Price/Book:

Dividends: Just as it has done for the past several years, IBM increased its quarterly dividend again in June, raising it over 13%, to $.85/share, from $.75/share. IBM's 5-Year Dividend Growth Rate is higher than its industry's average of 16.53%:

Increasing Your Yield By Selling Options:

Selling Covered Call options offers you a way to increase your dividend yield substantially, by gaining a second income stream. The trick in a rising market is to sell calls at a strike price high enough above the stock's price, so that your shares don't get assigned/sold away before the last ex-dividend date before option expiration.

Conversely, you may decide that the higher option yield offered by a strike price that's closer to the stock price gives you enough incentive to risk the loss of the dividend. Note: In general, stocks don't get assigned until closer to the option expiration price.

This JAN. 2013 IBM call option trade is currently paying $7.40, and is listed with over 30 other call trades in our Covered Calls Table:

Selling Cash Secured Put Options is a way to "sneak up on a stock", by achieving a lower break-even price. This JAN. 2014 put option from our Cash Secured Puts Table, currently pays $11.00, and offers a break-even cost of $184.00. As with selling calls, you'll receive the option premium within 3 days of making the sale. An additional bonus: if the option position isn't closed until 2013, you won't owe taxes on it until 2014. (Note: put sellers don't receive dividends.)

Financials: IBM has a very high Return On Equity, as it finances with debt more than its peers, but it also has a very impressive Interest Coverage figure:

Disclosure: I am long IBM.

Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.