IBM Is Worth the Money
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Old” tech companies seem to have fallen out of favor with some investors. Perhaps these names are not exciting enough, or are perceived to be obsolete. However, there are still plenty of opportunities among these firms.
IBM (NYSE: IBM) is one of the oldest and most venerable names in Information Technology, and has over the years transformed itself from a firm largely based around hardware to an IT services company, not without success. With stable earnings growth, and a reasonable valuation, it may be time to reconsider IBM.
IBM is a fairly massive company, with a market cap of over $210 billion and some 434,000 employees. Traditionally a defensive stock, it has a beta of only 0.71. Its key activities are IT services, with which it has acquired a leading position worldwide. Lagging behind the broader rally in risk assets, the stock has risen only a few percentage points over the last year. It has a dividend yield of around 1.9% at a payout ratio of only 23%, but with dividend growth outpacing its peers.
Over the last years, the company has displayed an ability to grow its earnings in a stable fashion. Earnings Per Share (EPS) has grown from $7.10 in 2007 to $15.25 in 2012, beating the consensus every year. Moreover, EPS growth has been higher than that of industry peers over the last years, which is always an encouraging sign. While First Quarter (Q1) 2013 EPS was up quite substantially from the same period a year ago, around 8%, it missed the consensus by $0.05. Still, the results show resilience in a tough environment.
While the company grew its income and margins, management lamented the fact that it was not able to close some of the deals it had planned, and which have now been moved into the second quarter. Predictably, hardware revenue was down quite substantially around 16%. Financing was the best performing division with revenue up 4% adjusted for currency. Software was flat, and services were down slightly. These results aren’t stellar, but it is not unusual for blue-chips to have a have a poor quarter once in a while. In fact, these results and a recent downgrade may offer an entry-point.
Computer Sciences Corporation (NYSE: CSC), a smaller competitor, has been struggling over the last few years. After peaking at an annual EPS of $5.28 in 2010, this figure dropped to $2.18 over fiscal 2013. The company had a huge miss in Q4 2012, and a few fairly bad ones in 2013 as well. Things aren’t expected to get much better either, with a 3-5 year expected growth rate of around -11%. The company has clearly not managed to perform as well as its larger counterpart in the last few years.
The same is more or less true for competitor Tech Data (NASDAQ: TECD). While annual EPS is growing, the company has been struggling throughout 2013 with three fairly large misses in a row. For Q4 2013, net sales were down 6% year-over-year, with Europe still proving to be especially tough. Things are expected to get a little better in fiscal 2014 however, with management expecting high single-digit sales growth in the first quarter.
Valuations and metrics
IBM is not an expensive stock at the moment, currently trading at 13.44 times trailing earnings and 2.09 times sales. The forward Price/Earnings (P/E) is only 10.65. The operating margin of around 21% is ahead of the competition, and the return on equity is outstanding at nearly 83%. While the company has a fairly large amount of debt on the books, the operating cash flow $19.32 billion is impressive.
The bottom line
IBM is perhaps not the most exciting of stocks, nor the fastest growing, but it is a very large and strong company that is still doing a good job of growing earnings in a tough macro-economic environment. A global leader in its industry, IBM should continue to perform well throughout the rest of the year, despite a disappointing first quarter. Furthermore, its reasonable valuation could easily account for some upside in the months to come.
Daniel James has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!