IBM (IBM) is looking good. In fact its looked good for a year now.
One-Year Chart
Last quarter Big Blue had profit growth of 22%. I’ve always liked the stock and in the past didn’t buy it because profit growth wasn’t 20%. Now that’s changed.
The best thing about this company is it has certainty. IBM isn’t much of a hardware company anymore, it focuses on long-term contracts to provide IT support. Those fees come in every year, and rise modestly. Managem,ent uses cash to buy back stock and also pays a 1.75% dividend.
Cloud computing? IBM can help with that.
In the end its like you’re getting a 11% grower plus 2% dividend for a 15% total return.
Ten-Year Chart
What makes IBM special is the P/E is only 13. Look at the ten-year chart. The profits have grown 12% a year but the stock hasn’t. Ten-years ago the stock was around $115 and the company was about to earn $4.34 that year. The P/E was 26. Maybe the P/E was high. Now its low.
Usually the Yearly Stock Growth is similar to the Yearly Profit Growth over a ten-year period. This isn’t close, and tells me the stock has some catching up to do. By the looks of the move higher IBM is on, it already has.
We are in a place in the stock market cycle where solid stable companies aren’t getting noticed. IBM’s P/E is 13, Microsoft’s (MSFT)is 10 after buying Skype yesterday (good move btw). Exxon (XOM) sports a 9.25 P/E. These stock’s show tremendous value and I feel the Rise of the Blue Chips will occur during the next tcwo years. This could push the Dow way past 15,000.
Fair Value
Fair value on Big Blue is 16 times earnings. The P/E could go bigger if we get into a market like the late-90s that appreciated good solid companies.
IBM is currently 24% undervalued and if we buy-and-hold till next year then the upside is 37%.
Bottom Line
I’m a growth stock guy and try to find companies that can grow exponentially. This is a little too slow for me. Still, the value and some growth is here and there’s enormous stability owning a stock that’s been splitting its stock since 1925 and has paid dividends since 1913. I have IBM on the radar.
Earnings table can be viewed here.
