IBM (IBM) got whacked after it reported profits two weeks ago. The company just isn’t growing. Sales dropped 13% last qtr — ouch. I think companies are using the cloud to store data on networks, and don’t have a need for IBM’s expertise.
The stock sells for just 10x earnings now, and I feel it is a great bargain. But you have to make a small investment and then hold, as it may be a while before the stock gets its mojo back.
The main issue plaguing the stock is this stock market we are in heavily favors growth stocks. Rapid growers are getting P/E’s higher than they should, in some cases way higher. No one want’s these value plays. When will the tide turn? My guess is next year, as the strong dollar is currently pressuring profits with many Blue Chip stocks.
Ten Year Chart
I think it’s amazing that the company was able to grow at a teens rate for much of the decade. Now that’s history. For now, but I’m confidend IBM will reinvent itself like it always has.
Profits are now set to be down this year. Maybe they can be down a lot, then rebound off the lows next year and then the company would have good news (and maybe a better stock price).
Profit History
Right now the yield is 3%. The estimated long-term profit growth rate is 7%, so in a perfect world you’re getting 10% growth for 10x earnings. Smells like a bargain to me. But this world isn’t perfect, its evolving. For now 11x earnings is where I see the stock.
Sharek’s Take
What IBM really needs to do is increase revenue, but with competition in the cloud serving up enticing prices that’s gonna be hard to come by. If the company can at least stop the bleeding maybe the stock could rise 20%. I feel that could happen in 2016 as the dollar might not be affecting sales and profits as badly. This is a great position for the Conservative Growth Portfolio but don’t make it a big position as it may be a while until value is back in vogue.
View the One Year Chart here. View the Earnings Table here.
