Is IBM Still a Winner?

With shares of International Business Machines Corporation (NYSE:IBM) trading at around $207.62, 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

IBM dominates in many different areas, including software, services, and hardware. Diversification, innovation, and superb management have been the keys to its success. But when you’re at the top, others will do their best to knock you off your pedestal.

Oracle Corporation (NASDAQ:ORCL) has been trying its best to steal market share from IBM. However, IBM has treated Oracle like an inflatable punching bag. Oracle is relentless and always comes back for more, but IBM will throw a punch to knock Oracle back down. This pattern then begins again.

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This rivalry has been intense over the past few years. It has included potential infringements as well as forced ad pulls. The most recent development has been Oracle stating that its SPARC servers are faster and more affordable than IBM servers. IBM basically referred to this as hogwash.

Both IBM and Oracle are well-run and successful companies. Instead of forming an opinion on which is a better company, let’s simply look at some comparative numbers. The chart below compares basic fundamentals for IBM, Accenture (NYSE:ACN), and Oracle. IBM has a market cap of $233.39 billion, Accenture has a market cap of $49.57 billion, and Oracle has a market cap of $150.88 billion.

IBM

ACN

ORCL

Trailing   P/E

14.57

17.78

14.91

Forward   P/E

11.35

16.33

10.93

Profit   Margin

15.89%

10.85%

28.46%

ROE

84.67%

61.32%

24.29%

Operating   Cash Flow

 $19.59 Billion

 $3.45 Billion

 $13.72 Billion

Dividend   Yield

1.60%

2.10%

0.70%

Short   Position

1.40%

1.10%

1.20%

 

Overall, it looks as though IBM and Oracle are pretty even on a fundamental basis – they’re both strong. Let’s take a look at some more important numbers prior to forming an opinion on IBM.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for IBM is considerably weaker than the industry average of 0.70. It’s also considerably weaker than the debt-to-equity ratios for Accenture and Oracle. This isn’t cause for concern for IBM, but it does show that Oracle has better debt management.

Debt-To-Equity

Cash

Long-Term Debt

IBM

1.75

$11.18 Billion

$33.27 Billion

ACN

0.00

$5.64 Billion

$29.00 Thousand

ORCL

0.45

$33.41 Billion

$19.75 Billion

 

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T = Technicals Are Weak  

IBM has been a steady performer over the past three years. It has outperformed Oracle over that time frame. However, it has underperformed Accenture. As noted in the chart in the Catalyst section, IBM yields 1.60 percent, Accenture yields 2.10 percent, and Oracle yields 0.70 percent.

1 Month

Year-To-Date

1 Year

3 Year

IBM

-1.24%

8.93%

2.86%

71.54%

ACN

-2.80%

14.53%

20.20%

93.19%

ORCL

-10.24%

-3.81%

9.69%

27.47%

 

At $207.62, IBM is trading above all its averages.

50-Day   SMA

206.37

100-Day   SMA

199.27

200-Day   SMA

198.56

 

E = Earnings Have Been Impressive            

There was a setback in revenue in 2012, which has been a common trend throughout the broader market after several years of impressive growth. However, what makes IBM different than most companies is continuous EPS growth.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

103.63

95.76

99.87

106.92

104.51

Diluted   EPS ($)

8.89

10.01

11.52

13.06

14.37

 

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

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

29.49

24.67

25.78

24.75

29.30

Diluted   EPS ($)

4.56

2.61

3.34

3.33

5.09

 

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

T = Trends Support the Industry

IBM is one of the most diversified companies in the entire technology sector. It operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Therefore, trends will likely support the industry somewhere.

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Conclusion

IBM can be summed up in one phrase: Diversification and Domination. Revenue growth has slowed, but IBM still delivers steady (and very large) profits. With superb cash flow, strong potential for continued innovation, and a history of returning capital to shareholders, IBM is an OUTPERFORM.

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