Today, we’re looking at Dow Jones Industrial Average component IBM (NYSE:IBM). As I’ve said before, I am not Mr. Tech Guy. In the old days, when IBM was just a computer company, it was easier to evaluate. Today, however, IBM isn’t my father’s IBM.
I mean that literally. My dad used to work there, and he doesn��t recognize it, either. Its Global Technology Services segment provides IT infrastructure, business process and support services. Its Global Business Services segment offers consulting and systems integration, and application management services. Its Software segment offers middleware and operating systems software of every kind and variety. Its Systems and Technology segment provides computing and storage solutions. Its Global Financing segment provides lease and loan financing to end users and internal clients.
Quite frankly, even those few sentences oversimplify all that IBM does.
What I do know is that IBM has to deal with the economy and competition. And the competition is fierce. Off the top of my head, Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ), Accenture (NYSE:ACN) and Dell Computer (NASDAQ:DELL) are just some of the other players. Pressure much? Add in the fact that many of IBM’s services can be expensive, and in tough economic times, revenue may suffer.
On the other hand, IBM is a global brand, so the company boasts economic and geographic diversification. Mind you, IBM also has to constantly innovate to keep up with the competition, and that can be expensive.
IBM, like most other Dow components, sits on hoards of cash — $13 billion of it, against only $19 billion in debt. Trailing 1! 2-month free cash flow was $9.2 billion. Wow! Think about just how much money that is. Nine billion dollars left over after all the big expenses and taxes and everything else. That’s almost 12 times what it needs to pay its 2.1% dividend. But take note: That dividend isn’t what you’d expect from IBM. I should think it would be higher, but the company needs that excess cash to keep innovating.
Stock analysts looking out five years on IBM see annualized earnings growth at a modest 7.5%. At a stock price of $23, on FY 2011 earnings of $4.87, the stock presently trades at a P/E of only 4.7. Only HP has a 5 P/E. Dell’s is 7.
Conclusion
Slapping a 12 P/E on projected 2015 earnings of $21.41, including reinvested dividends, gets us a price target of $256, or a 40% return from here. Again cautioning readers that tech is not my area of expertise, on a numbers basis, IBM looks undervalued with its meager P/E ratio and great free cash flow. I’m not crazy about IBM for retirement accounts because its dividend is low, but its track record of things like return on equity (22%) is so high, the stock has done extremely well over the long term — in fact, it recently reached an all-time high.
- I believe IBM is a buy for regular accounts.
- I believe IBM is a buy for retirement accounts.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.
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