Want to know what’s going on with the stock market now that we’re in a correction? Why is this happening? How low will it go? What will happen in 2013? Take a look at IBM (IBM) you can get a picture of the market.
I first want to say the news on IBM isn’t that bad. The company missed by a penny, 2012 estimates fell by only a penny, 2013 estimates fell by another penny and next quarter’s estimates fell by two cents. This company will make fifteen bucks this year — and is a master of underpromising to overdeliver. BTW, the press has it that IBM has met or beaten for 27 straight quarters, but that’s wrong. Last quarter’s estimates were lowered so it would look like a beat.
One Year Chart
IBM reported earnings last Tuesday after the close. The market started falling that day. Note the gap down IBM took after results (on the right of the chart). This was from revenue falling short of expectations ($24.7 bill vs. the $24.8 bill est.) and backlog not growing (meaning sales could be a little light in 2013).
That’s the bad news. The good news is profit growth should be in the teens the next six months and IBM’s P/E is only 13. The stock also pays a dividend of more than 3%, so this stock is a great value right now. 2012 is IBM’s 17th straight year of a dividend increase.
A great value is alos what the stock market is. P/Es on stocks should be much higher than they are today. The market should be 25% higher than it is now (using historical measurements). IBM should also be higher — its a steal down here if you’re a conservative investor.
Fair Value
IBM should have a P/E of at least 15, which means 30% upside potential to its 2013 Fair Value. Tack on the dividend and this stock should be a third higher next year. That’s a solid investment in a short period of time. Asking for the P/E to rise from 13 to 15 isn’t asking for much.
Sharek’s Take
IBM is a mirror of the market. Investors are skittish this month because business might not be as good as we hope. Still, valuations are very low so there’s not a big risk of a decline, and upside is very healthy over the long term — both with this stock and the market.
