The Simple Genius of IBM

With shares of International Business Machines (NYSE:IBM) trading at around $201.75, is IBM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

People who make predictions are swindlers! Well…not exactly, if the prediction is based on research and factual numbers. Some analysts actually have an impressive track record. However, even if you don’t believe that humans are capable of making accurate predictions, then maybe you at least believe that machines are capable of such a feat. If that’s the case, then you might want to consider an investment in IBM.

IBM’s Big Data & Analytics segment can help predict patterns and/or changes in customer behavior. This is highly detailed information that would take humans eons to perfect. IBM originally expected revenue of $16 billion for Big Data & Analytics by 2015. That estimate has now been raised to $20 billion. IBM’s two other big growth initiatives are cloud computing and Smarter Planet.

IBM is a highly diversified company with phenomenal management. For example, since 2010, IBM has made 35 acquisitions for approximately $12 billion. This is impressive and has helped fuel growth. What’s more impressive is that IBM divested many of its underperforming assets over the past 10 years, saving it $15 billion. Therefore, the company has a net gain through acquisitions and divestments before any potential growth seen through acquisitions, because it was willing to cut the cord on what wasn’t working. IBM’s strategy of continuously pouring money into successful segments of the business and growing through innovations and acquisitions while “getting rid of the bad” is what gives IBM that simple genius reputation.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for IBM is higher than the industry average of 0.70. The balance sheet is in negative territory. However, operating cash flow is phenomenal at $19.60 billion. Levered free cash flow is also very impressive at $15.72 billion.

Photo: http://wallstcheatsheet.com IBM

T = Technicals on the Stock Chart Are Strong 

IBM has outperformed Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) over three-year and one-year timeframes. That trend has changed as of late, but Dell and Hewlett-Packard are going to see bigger moves. IBM is the large, steady ship in the sea. As far as dividend yield, Dell yields 2.30 percent, Hewlett-Packard yields 2.70 percent and IBM yields 1.70 percent.

Photo: http://wallstcheatsheet.com/ IBM

At $200.83, IBM is currently trading above all its averages.

50-Day   SMA

197.57

100-Day   SMA

196.50

200-Day   SMA

196.58

E = Earnings Have Been Consistent              

It’s not often that you find a company with consistent earnings growth on an annual basis for five consecutive years. Revenue hasn’t been as consistent, but it’s still impressive in a macro sense.

Photo: http://wallstcheatsheet.com/ IBM

When we look at the last quarter on a year-over-year basis, we see a slight decline in revenue and a moderate increase in earnings.

Photo: http://wallstcheatsheet.com IBM

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

IBM has five segments, which are Global Technology Services, Global Business Services, Software, Systems and Technology and Global Financing. This strong diversification leads to a high probability of a positive trend somewhere. The only real threat is a complete economic collapse.

Conclusion

IBM is currently trading at 14 times earnings, which is well below the industry average of 24 times earnings. Margins are solid, cash flow is superb, earnings growth is consistent and there is a 1.70 percent yield. There’s a lot to like. A pullback is definitely possible, but IBM is for investors interested in the long haul, and over the long haul, IBM is a winner.

IBM is a long-term OUTPERFORM.

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