November 6, 2023, $148.97
Business Overview:
- IBM is an information technology company offering integrated solutions that leverage IT and business process knowledge. It operates through segments including Software, Consulting, Infrastructure, Financing, and Others. The Software segment focuses on hybrid cloud and software solutions. The Consulting segment integrates strategy, experience, technology, and operations. The Infrastructure segment provides hybrid cloud solutions optimized for AI integration. The Financing segment facilitates client and commercial financing for IT acquisitions. IBM was founded in 1911 and is headquartered in Armonk, NY.
Maverick Guidance:
- Short-term technical buy/sell recommendation: BUY
- Long-term portfolio recommendation: BUY, but only for high dividend yield and potential recovery
- If a Maverick is primarily interested in dividend income, IBM is a BUY. Otherwise, for most Mavericks, IBM is not a suitable portfolio selection as the 10-year annual total return is a dismal +2.69% (4th Quartile in Dow 30). Despite possible improvements, there are ten better alternatives in the Dow 30 for each of the five unique Maverick portfolios.
Consideration for Maverick Portfolio:
X = Not appropriate in any portfolio for Maverick investors, but presently under review.
Market Guidance:
- Consensus Analyst Ratings— MarketBeat = Hold, TipRanks = Moderate Buy
- 9 Wall Street analysts have offered 12-month price targets in the last 3 months. There are 3 Buy, 6 Hold, and zero Sell. (from TipRanks)
- Based on 9 Wall Street analysts offering 12-month price targets in the last 3 months, the average price target is $149.75, with a high forecast of $179.00 and a low forecast of $130.00. The average price target represents a 0.80% change from the last price of $149.75. (from TipRanks)
- Dividend Yield: $1.66 per share paid quarterly to yield 4.88%.
- Dividend growth for over 15 years. (from TipRanks)
- Technical Sentiment (based on Technical Indicators and Moving Averages):
- Investing.com = Daily (STRONG BUY) and Weekly (STRONG BUY)
- TipRanks = Daily (BUY) and Weekly (STRONG BUY)
Value Line Guidance:
- Company Financial Strength Rating: B++ (weak compared to the average Dow 30 company)
- Share Price Safety, Market Timing, Technical Rank: 1=best. 5=worst
- Share Price Safety: 3 of 5
- Market Timing: 3 of 5
- Technical Rank: 3 of 5
- Beta: 0.95
- Stock’s Price Stability: 90/100
- Price Growth Persistence: 5/100
- Earnings Predictability: 85/100
- Average Annual PE: 14
- Average Annual Sales Growth in the past 5 years: -3.5%
- Average Annual Sales Growth for the next 5 years: Nil
- Average Annual Cash Flow Growth in the past 5 years: -2.5%
- Average Annual Cash Flow Growth for the next 5 years: +2.0%
- Average Annual Earnings Growth in the past 5 years: -7.0%
- Average Annual Earnings Growth for the next 5 years: +3.5%
- Average Annual Dividend Growth in the past 5 years: +1.5%
- Average Annual Dividend Growth next 5 years: +3.5%
- Average Annual Dividend Yield 3 to 5 years: +1.5%
Financial Performance
- 10-year Average Annual Total Return: +2.69% (through Nov 6, 2023)
- EPS
- 2021: $9.97
- 2022: $9.13
- 2023: e$9.26 (from MarketBeat)
- 2024: e$9.81 (from MarketBeat)
- Average Annual PE: 14 (VL Quarterly Report)
- PEG Ratio: 7.06 (FinViz)
- Beta: 0.75 (FinViz)
Quarterly Reports Summaries (including Revenue, Cash Flow, Earnings):
3Q2023 (September) (Oct. 25 report)
IBM reported its 3Q2023 earnings with the following key highlights:
- Revenue of $14.8 billion is up +4.6% (3.5% at constant currency).
- Software revenue is up +8%, up +6% at constant currency.
- EPS (GAAP) $1.86, Non-GAAP $2.20
- Consulting revenue is up +6%, up +5% at constant currency.
- Infrastructure revenue is down -2%, down 3% at constant currency.
- Gross Profit Margin: GAAP 54.4% is up +1.7 points; Operating (Non-GAAP) 55.5%, up +1.6 points.
- Pre-Tax Income Margin: GAAP 12.7% is up +44.6 points; Operating (Non-GAAP) 15.6%, up +1.7 points.
- Year-to-date net cash from operating activities of $9.5 billion is up +$3.0 billion; free cash flow of $5.1 billion, up +$1.0 billion.
Segment Results for the Third Quarter:
- Software revenues of $6.3 billion, up +7.8% (+6.3% at constant currency).
- Consulting revenues of $5.0 billion, up +5.6% (+5.0% at constant currency).
- Infrastructure revenues of $3.3 billion, down -2.4% (-3.2% at constant currency).
- Financing revenues of $0.2 billion, up +6.9% (+5.1% at constant currency).
IBM’s full-year 2023 expectations include:
- Constant currency revenue growth of 3-5%, with currency expected to be about a one-point headwind.
- Free cash flow of about $10.5 billion, up more than +$1 billion year to year.
2Q2023 (June)
- Revenues of $15.48 billion, slightly below the previous year.
- Positive results from the Software and Consulting segments, driven by hybrid cloud and AI capabilities.
- Weak performance in the Infrastructure division due to product cycle dynamics and tough comparisons.
- Share earnings of $2.18, a 6% decrease due to increased labor costs and lower volumes, partially offset by favorable pricing and productivity initiatives.
- Anticipated solid top-and bottom-line growth for the year, with expected constant currency revenue growth between 3% and 5%.
- Plans to improve margins through a better portfolio mix and productivity initiatives, along with price increases to offset inflationary pressures.
- Recent acquisitions to bolster the hybrid cloud and AI strategy.
- Expected 5% growth in share earnings for the year.
- While IBM shares are projected to track market averages in the short term, the stock is expected to offer limited price appreciation potential over the 3- to 5-year period. Nonetheless, its 4.5% dividend yield could attract income-seeking investors.
1Q2023 (March)
- Slight revenue growth compared to the previous year, with a 4% increase excluding the impact of unfavorable foreign exchange rates.
- Strong performances from the Software and Consulting segments, driven by demand for hybrid platforms, transaction processing, and data and customer experience transformation projects.
- Decline in sales from the Infrastructure segment due to weaker demand for infrastructure support.
- Share earnings of $1.36, slightly below the previous year, attributed to the impact of unfavorable foreign exchange rates despite a favorable product mix.
- Revised top-line estimate for 2023 to $62.3 billion and maintained bottom-line estimate at $9.40 per share.
- Expected constant currency revenue growth between 3% and 5% for the year.
- Anticipated good results from the Software group, including contributions from Red Hat and decent growth from the Consulting segment driven by application operations and business transformation services.
- Predicted widening of margins for the year due to increased revenues, a favorable product mix, higher sales prices, and ongoing productivity improvement initiatives.
- IBM shares are projected to trail the broader market averages in the short term, with a dividend yield of 4.9% that could attract income-seeking investors. However, over the 3- to 5-year period, the stock is expected to offer limited price appreciation potential despite a modest increase since the previous report in March.
The 3-to-5-year Operational and Financial Outlook:
- The 3-to-5-year outlook indicates continued slow growth in revenue and earnings.
- The company’s long-run outlook is cautiously optimistic.
Company SWOT Analysis
Internal Strategic Factors:
Strengths:
- Pioneer of cloud technologies, including the Blue Cloud program.
- Strong brand reputation and value.
- Diversified businesses across various divisions.
- Geographical diversification in revenue generation.
- Capability for strategic acquisitions.
- Successful implementation of a three-market structure.
- Interrelated products for effective up-selling.
- Consistent investment in research and development.
- Strong commitment to employee training.
Weaknesses:
- Main focus on product customization for large and medium enterprises.
- Generic products with low barriers to entry.
- Declining popularity and brand value.
- Stiff competition from industry leaders.
- Legal challenges impacting reputation.
- Expensive solutions limiting affordability.
External Strategic Factors:
Opportunities:
- Expand software divisions for higher profitability.
- Leverage growing demand for cloud services.
- Capitalize on accelerated digital transformation.
- Pursue more expansions and acquisitions.
- Focus on consultancy services expansion.
- Seize opportunities for technological advancements.
- Interpret market trends and consumer behavior.
Threats:
- Intense competition in the cloud computing market.
- Potential impact of a slowing global economy.
- Heightened competition from industry leaders.
- Negative effects of the COVID-19 pandemic.
- Risks associated with currency fluctuations and changing economic policies.
- Challenges related to changing laws and regulations.
FinViz Snapshot: https://finviz.com/screener.ashx?v=341&t=IBM
10-Year Historical Price Chart:
Point & Figure Chart:
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