Credible Wall Street analysts and bloggers on International Business Machines (IBM) stock
Key Points
International Business Machines has been a major laggard in the tech sector over the last 5 and 10-year periods. However, the stock has outperformed during 2022 thus far, due to its strong cash flows and relatively low valuation.
IBM posted Q3 earnings this week, causing the stock to rally by 6.5%.
The credible analysts that Nobias tracks see total return potential of nearly 14% from the stock’s current share price.
Performance
Event & Impact
Nobias insights
International Business Machines (IBM) has been a bit of an enigma for investors over the last decade or so. The company has drastically underperformed many of its big-tech peers, causing many to question whether or not this company has what it takes to return to the strong growth that it was once known for.
Over the last decade, IBM shares are down by 29.6%, while the S&P 500 is by 165.79% and the tech-heavy Nasdaq is up by 263.45%. During the last 5 years, IBM shares have fallen by 12.75% while the S&P 500 is up by 46.07% and the Nasdaq has risen by 64.58%. However, during 2022, IBM has outperformed.
IBM Oct 2022
On a year-to-date basis, IBM shares are down by just 4.51%, favorably compared to the S&P 500 which is down by 21.76% and the Nasdaq which is down by 31.41%. Furthermore, IBM posted Q3 earnings this week, beating Wall Street’s consensus estimates on both the top and bottom lines. These results caused IBM shares to rally by 6.53% this week.
Bullish Nobias credible authors:
Coming into earnings season, Yves Sukhu, a Nobias 5-star rated author, published a pre-earnings breakdown of IBM’s business at Seeking Alpha. Sukhu touched upon IBM’s recent operational strength, stating, “During the recent Goldman Sachs Communacopia and Technology Conference, John Granger, Senior Vice President of IBM Consulting, noted that “[IBM is] a big consulting player…[with] 150,000 professionals across the world. Revenue is approaching $20 billion. And within the IBM family, [consulting is] about a third of IBM’s revenue, but nearly two-thirds of IBM’s people.”’
Sukhu also highlighted recent merger and acquisition activity that IBM’s management team has embarked upon which, in their view, bolsters future growth prospects. They wrote, “IBM’s acquisition of Instana in 2020 gave the company a boost in the large, multi-billion dollar application performance management (“APM”) market.”
Regarding IBM’s APM segment, Sukhu continued, “This complexity – which is increasing in many ways – drives the need for APM solutions, and I theorized in the same article on DDOG that investors might see a certain resiliency within that market despite the economic slowdown.”
Moving away from IBM’s APM segment and towards another area of the business with secular growth prospects, Sukhu highlighted recent activity in the digital security space. They quoted Arvind Krishna, IBM’s CEO, stating, “During the Q2 FY ‘22 Earnings Call, Mr. Krishna noted that “[given] the importance of cybersecurity, in this past quarter, we also acquired Randori, a leading attack surface management, and offensive cybersecurity provider.”’
Sukhu went on to say, “This builds on the recent acquisition of ReaQta and the launch of QRadar XDR.” They continued, “As the computing environments become more complex (see the prior point), security becomes that much more difficult. I think management shows good judgment pushing further into the security space as it is somewhat hard to imagine enterprises spending significantly less on security regardless of economic conditions.”
And lastly, Sukhu put a spotlight on IBM’s work in the automation and artificial intelligence industries, writing, “Automation is also front-of-mind for many organizations today as they attempt to streamline routine workflows and free-up employees to focus on more strategic work.”
“Accordingly,” Sukhu continued, “Mr. Krishna explained that “[this] is one of the many reasons we are investing heavily in both AI and automation.”’ Ultimately, looking ahead to IBM’s recent Q3 earnings report, Sukhu concluded, “I think IBM’s core business will continue to throw off cash for a long time to come; and the stock likely will suit income investors just fine during that time.”
Lance Jepsen, a Nobias 4-star rated author, highlighted IBM’s Q3 top and bottom line results in a report published at Guerilla Stock Trading this week. Jepsen wrote, “On October 19, 2022, IBM announced third-quarter 2022 earnings results. IBM reported Q3 adjusted EPS of $1.81 versus the consensus estimate of $1.77. The company reported Q3 revenue of $14.1B versus the consensus estimate of $13.51B.” He also quoted Krishna from the company’s Q3 report: "IBM delivered strong revenue growth in the quarter, reflecting our continued focus on the execution of our strategy. Globally, clients view technology as an opportunity to enhance their business, which is evident in the results across our portfolio," said Arvind Krishna, IBM chairman and chief executive officer. "With our year-to-date performance, we now expect full-year revenue growth above our mid-single digit model."
Trapping Value, a Nobias 4-star rated author, published a post-earnings report titled, “IBM: Impressive Q3 Numbers, But The Stock Is Not Cheap” this week, analyzing the quarterly results and ultimately, confirming a tepid outlook for IBM shares moving forward. Trapping Value highlighted a bullish aspect of IBM’s Q3 report: its strong margins. They wrote, “Beyond the impressive revenue strength, IBM really brought it home for investors by maintaining gross margins in a very challenging environment. With the dual hits of inflation and US Dollar strength, one would have expected to see gross margins weaken substantially.”
Trapping Value continued, “We did see some weakness with overall gross margins dropping from 53.6% to 52.7%, but that is far less than what we thought would occur.” But, moving onto a “significant” concern for them, Trapping Value highlighted IBM's high debt load and a recent multi-billion headwind that the company experienced while attempting to fund its pension liabilities.
Trapping Value wrote, “IBM set aside a certain amount of money to fund defined benefit pension obligations. On transfer to the third party, it was determined that IBM was overoptimistic with their return assumptions and the amount of cash set aside for the defined benefit, would not quite cut it. The net hit to IBM to get it off their books was $5.9 billion. As this expense is eligible for a tax write-off, the net impact was $4.4 billion.” They continued, “This is not chump change and exceeds the entire free cash flow till the third quarter for IBM.”
Taking a step back and looking at the quarter and the company’s full-year guidance, Trapping Value stated, “The $10 billion outlook for free cash flow on the current market capitalization is quite impressive.” They also noted, “If currency headwinds reverse next year, we could see this number move up to $11-$12 billion and that free cash flow yield would be enticing.” But, looking at the company’s dividend yield of 5.08% they said, “IBM's dividend yield is attractive for a large-cap firm, but in the context of rising interest rates, we don't see this as enough by itself.”
Transitioning towards IBM’s valuation, Trapping Value wrote, “The P/E multiple remains low and at 13x earnings, no one will complain that you are paying an arm and a leg for this.” “But,” they continued, “the bigger issue to get behind the company remains the total valuation when debt is included. EV to EBIT or EV to EBITDA don't look attractive at all.”
All in all, Trapping Value concluded, “With the rapid rise in interest rates and a plethora of opportunities around, we don't think we will chase IBM up here and continue to look for a two-digit price to get interested.” Although Trapping Value stated that IBM’s 5% dividend wasn’t attractive on a stand alone basis (in their opinion), this is a popular stock amongst income oriented investors.
After the company posted its Q3 results, Tradevestor, a Nobias 5-star rated author, published an article at Seeking Alpha titled, “IBM Q3 Earnings: Dividend Coverage Check-In” which put a spotlight on the company’s dividend safety.
Tradevestor touched upon IBM’s dividend safety metrics using the Q3 results, stating:
Total shares outstanding: 903.18 M
Current quarterly dividend per share: $1.65
Quarterly FCF required to cover dividends: $1.490 billion
FCF in Q3: $0.8 billion - According to the earnings release: "On a consolidated basis, in the third quarter, the company generated net cash from operating activities of $1.9 billion or $1.2 billion excluding IBM Financing receivables. IBM's free cash flow was $0.8 billion."
Payout ratio using FCF: 186.25% ($1.998 billion divided by $2.9 billion)
EPS reported: 1.81 cents
Payout ratio using EPS: 91% ($1.65 divided by $1.81)
They continued, “Wait, what? Is the dividend in danger given that EPS-based payout is so high at 91% and free cash flow based payout ratio is double that at a disastrous looking 186%? Not so fast. In the same earnings release, it says, "The company continues to expect about $10 billion in consolidated free cash flow."’
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Therefore, they ran the numbers using full-year guidance figures and came up with these results:
Total shares outstanding: 903.18 M
Current annual dividend per share: $6.60
Annual FCF required to cover dividends: $5.960 billion
Projected FCF for 2022: $10 Billion. IBM already has $7.83 billion in the first 3 quarters, including the just reported ~0.8 billion.
Payout ratio using annual FCF: 59.60% ($5.960 billion divided by $10 billion)
Projected forward annual EPS for 2022: $9.29
Payout ratio using EPS: 71% ($6.60 divided by $9.29)
Ultimately, Tradevestor concluded, “To summarize, IBM's dividend coverage after this quarterly result and projections is sound based on both FCF and EPS, with FCF projecting a more accurate picture.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 60% of recent articles published by credible authors tracked by the Nobias algorithm have expressed a “Bullish” bias towards shares. And the credible Wall Street analysts that Nobias tracks agree with this sentiment. Right now, the average price target being applied to IBM shares by credible analysts is $148.00. After its 6.5% weekly rally, IBM closed Friday’s trading session at $129.90. Therefore, relative to the credible analyst average price target, IBM shares offer upside potential of approximately 14%.
Disclosure: Nicholas Ward has no IBM position. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.