IBM dropped significantly today when it reported its earnings, which were significantly less than the consensus analyst estimate. This major earnings failure comes at the same time as investors are beginning to question IBM’s sustainability and power; whether or not Big Blue really has the same ability to grow as it did before.
In actuality, IBM is not nearly the company it was before. The company is currently going through a huge transition from a hardware company to a software company, focusing on high growth areas such as the cloud. The company has already shed off many of their hardware businesses by selling them off, and today has even reported that they will pay GlobalFoundries $1.5 billion to take their semiconductor chip units, a part of the business that has been unprofitable for years.
The main argument against IBM is that their revenues have been falling for years now, and will likely continue into the future. That, however, is misguided, since the most fundamental reason that IBM’s revenues have been falling is because they have been going through this business transition, and need time to re-stabilize their business.
At trailing and forward P/E ratios of just 10, IBM is exceptionally undervalued. This is a company that has major market share in a rapidly growing part of the tech industry: the cloud.The growth prospects and what IBM could do with their new business position are enormous, yet the market is valuing its growth potential like it’s nothing.
Also, IBM is a dividend aristocrat, meaning that the company has increased their dividends for more than 25 years in a row, adding up to a very nice flow of cash. The company is also a serial re-purchaser of their own stock. Spending billions of dollars in buybacks every year, the company is still speeding up their share repurchases, especially since they think shares are so undervalued now.
The company is also very good at setting goals and achieving them, never straying from the path to success. Management lays out what they call “road maps” every few years, which involve setting an EPS price target for the future years. They easily attained their last road map target a few years back, and are currently on a good track to surpass their 2014 target of $16 per share.
It’s also worth a mention that respected investor Warren Buffett also holds IBM as one of his core “Big Four” holdings. These Big Four stocks are four companies (WFC, KO, AXP, and IBM) that he has held through thick and thin, good and bad. These are companies that he expects to hold forever, and expects them to be extremely lucrative over that time period as well. He recently purchased IBM, but the other three were bought in the 1960s and 1980s, and have now netted him gains in the thousands of percentages and vastly outperformed the market. Also, IBM is a technology company, an industry that Buffett has long declared too hard to understand and changeable. The fact that IBM is one of the only tech companies in his entire portfolio shows that he has probably already done much research on the company and therefore trusts it above all others.
In conclusion, IBM is a great company that is trading at incredibly low valuations in the short term. These valuations should stabilize to an acceptable level in the future, which should most likely also reflect some premiums because of Warren Buffett’s support of the company and it’s shareholder-friendly history. The current bearishness in the company is only an effect of revenues that have dropped in the short-term due to an inevitable company transition into the software business. This issue of revenues will come to pass when the company gets back on track with their business and finishes their transition into the software business. Investors should look to IBM for sustainability, growth, and undervaluation.
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