Start Buying The Leading Innovation and Global Leader IBM

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Internation Business Machines Corp. (IBM) is one of the largest IT companies with an array of offerings, including system hardware, infrastructure software, outsourcing, and systems integration services. IBM offers its products through its global sales and distribution organization, as well as through a variety of third party distributors and resellers. The firm has operations in more than 170 countries and generates about 65% of revenue from abroad.

IBM is a 100-year-old technology company, focusing on providing business technology. The company has revitalized itself over the last two decades by moving away from commodity hardware to focus on mainframes, software, and services. The stock recently closed at $190.72. In the past year, the stock has hit a 52-week low of $177.06 and 52-week high of $211.79. Technical indicators for the stock are bearish for the short term but, the fundamental indicators set a strong outlook for IBM in the next periods.

GROWTH AND BALANCE SHEET

The company has beaten analyst targets in the last four quarters. However, the revenue targets for the quarter were missed by approximately 3%. The main reason behind the miss was the adverse impact of currency fluctuations. IBM reported its Q3 2012 earnings where revenues were at $24.7 billion, while EPS were $3.62, and annual EPS growth rate over the past five years is 16.60%. The company repurchased about $9 billion of its own shares over the last nine months, at an average price of $195 a share. Current ratio is 1.22 while quick ratio is 1.15. These are favorable levels for the company. But, the total debt/equity of 156.29% is rather high.

More on IBM after the jump!

VALUATION

According to brand equity database BrandZ, IBM is the second most valuable brand after Apple. IBM is trying to achieve operating EPS of $15.10 this year and EPS of $20.00 a share in fiscal 2015. IBM has a PEG ratio of 1.19, at the industry average. The P/E of 13.77 is attractive and close to the industry average. The stock is currently trading below its fair value of $193. The beta of 0.69 implies very low volatility of the stock relative to the S&P 500. IBM pays a quarterly dividend, for an annual dividend yield of 1.7%. IBM has ranked number 1 for annual patents awarded every year for the past 19 consecutive years. The company spent an average of $6 billion per year over the last three years on research and development.

RECOMMENDATION for next 6 months: We initiate our coverage with START BUYING. The company has demonstrated a pattern of bearish technical signs but there is evidence of steady earnings performance and high visibility for the future EPS. Shares are up 3.67% year to date as of the close of trading recently.

For trading we suggest a long call at $205 strike price January expiration at $1.80 per contract and short the call at 205 strike December expiration for $0.85 per contract.

Monday October 17, 2012 – Societe Generale reduced its rating on International Business Machines (NYSE: IBM) from Hold to Sell with a $188 price target.NEWS and CALENDAR

Wednesday October 3, 2012 – IBM Boosts Security, Cloud and Analytics Capabilities With New Power Systems, Storage and Mainframe Technologies

Monday October 1, 2012 – IBM teams with ESB to develop an Electric Vehicle Smart Charging IT System in Ireland

Wednesday September 5, 2012 – IBM Accelerates Smarter Commerce Through Intelligent-Guided Customer Experience

Strengths vs. Weaknesses

The company has developed a mighty brand name due to its diverse business and subsequent economies of scale. The emerging markets in Asia provide IBM opportunities to grow. On the other hand, bad acquisitions have hurt IBM in the past. Intense competition in the industry lead the earnings to suffer. The substitute products from competitors and Euro debt crisis have affected IBM’s capacity to grow as a leader in the industry.

Stock Valuation Model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic Value

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

IBM’s intrinsic value is $193.00 the current price is $190.72; therefore, the stock trades very close to its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

This is the investor’s sentiment for the stock.

Analyst Ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

Each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high.

IBM’s annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 7.15, 8.89, 10.01, 11.52, 13.06. This type of earnings action is favorable.

Total Debt to Equity

The company must have a low debt to equity ratio, which indicates a strong balance sheet. The debt to equity ratio should not be greater than 20% or should be less than the average debt to equity for its industry.

IBM’s total debt to equity of 156.29% is not acceptable.

EPS Growth Quarter Over Quarter

The EPS growth for this quarter relative to the same quarter last year should be equal or more than 15% to be considered good growth for the company. Stocks with improving earnings are worthy of your extra attention.

IBM’s EPS growth for this quarter relative to the same quarter a year earlier is -4.30% and this is well below our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

IBM’s annual earnings growth rate over the past five years is 16.60%. This is median of our target growth and therefore, acceptable.

Current Price Level

Traders should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

IBM’s 52 week high is $211.79 current price is $190.72. This is only 11% below the 52 week high.

P/E Ratio

The price to earnings (P/E) ratio, based on the greater of the current P/E or the P/E using average earnings over the last 3 fiscal years, must be moderate, which in this model states is not greater than 15. Stocks with moderate P/E ratio are more defensive by nature.

The company has a P/E ratio of 13.71 which is slightly below the average industry P/E ratio of 13.75. IBM is well below the S&P 500 P/E ratio of 16.30.

Insider Ownership

When there is strong insider ownership, such as 12% or more, management is more likely to act in the best interest of the company as their interests are usually in line with that of the shareholders.

Insiders own 0.09% of IBM stock. Management’s representation is not large enough. This does satisfy the minimum requirement, and companies that do not pass this test are less attractive.

Technical Analysis

I am using several technical indicators (MACD, RSI, MFI, OBV, position indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

IBM shares should first meet resistance at the 200-day moving average (MA) of $197.92 and find additional resistance at the 50-day MA of $202.57.