The stock market — and my stocks in particular — are in a correction. But when I look at the charts I’m surprised to see the Dow Jones Industrial Average (DJIA) and IBM (IBM) are both near their highs. Let me rephrase, the Dow is close to record highs and IBM is close to six-month highs. It’s remarkable IBM is even closer to its highs as it as to its lows as the company has been battered in the news because it’s not growing sales anymore. Still, IBM does buy back stock and pays a nice dividend so you could make 10%-12% a year in the stock.
What I want to see is if IBM has the juice to keep going higher. If so, then the Dow — and the market — can probably go higher too.
One Year Chart
The big negative here is profit’s were down 15% last quarter — and this estimate fell 75 cents the quarter earlier. The lowered estimates sparked concerns business as deteriorating. But now after IBM’s reported it seems business has stabilized (NxtQtr’s est got trimmed by only 7 cents).
Looking ahead, Estimates show profit growth of +10% and +11% the next two quarters. That’s solid, but not great as sales are still expected to be down. The problem with the stock now is the P/E is 11, and I don’t think the stock can get one much higher.
Fair Value
IBM has a lot of good things going for it. It has grown profits 13% a year for the last decade and pays a dividend of 2%. But since sales growth has slowed, the Estimated Long Term Earings Growth Rate is only 9% per year. Still, 9% earnings growth plus a 2% dividend should mean an 11% total return. Under normal circumstances that would award a stock of this quality a p/E of around 15. But IBM has only had a median P/E of between 11 and 13 each year since 2008.
A couple of years ago I put my Fair Value P/E on IBM at 15, but it never got close to that. Now, with sales coming in below year-ago periods I feel IBM is worth 12 times earnings. Still, that leaves us with good 13% upside to this year’s Fair Value — plus a generous dividend.
Sharek’s Take
The thing that works in IBM’s favor right now is profit growth is expected to be 10% and 11% the next two quarters. That’s double-digit earnings growth for a big stalwart and should keep the stock moving higher. I feel the market can take IBM’s P/E from 11 to 12 and that would deliver a big difference (13%) in the stock price. I think if IBM can deliver good growth like that some other companies in the Dow can do the same. Bottom line: I feel the stock market can continue rising through the rest of the year, albeit at a slow and reasonable pace.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
