Cheap Valuation Makes IBM Stock A Long Term Investment?

  • IBM has reported Q3 FY 15 results where its top and bottom lines continued contracting.
  • IBM's Strategic Imperatives continue to impress.
  • Currency headwinds that have been wreaking havoc with the company might decrease in the future and ease the pressure on its top line.
  • IBM stock is real cheap and good for long-term investors who are willing to hold them for at least five years.

Erstwhile tech giant IBM (NYSE:IBM) has reported its third quarter earnings, and it wasn’t pretty. IBM reported revenue of $19.28 billion, a worrying 14% Y/Y decline and badly missing consensus estimate of $19.62 billion. The company’s earnings were somewhat a mixed bag: non-GAAP EPS of $3.34 topped estimate of $3.30, but was nevertheless represented a 9% Y/Y drop. GAAP EPS of $3.02 represented an even bigger 13% Y/Y decline. This is the 14th straight quarter in which IBM’s revenue fell, and there does not seem to be an end to this decline the near future. After all, IBM revised its full-year earnings projection downwards to a lower range of $14.75-$15.75, whose midpoint is well below analysts’ consensus estimate of $15.68.
IBM revenue chart

Source:IBM revenues data by amigobulls.com

IBM pinned the blame for the awful quarter on continuing currency headwinds. The company pointed that currency headwinds nicked 9 points from its top line, and its revenue would have fallen only 1% without FX headwinds. But it’s not clear whether IBM’s calculations are completely accurate because Americas’ revenue, which has minimal FX exposure, declined 10% to $9.1 billion. Asia-Pacific revenue fell a jaw-dropping 19% to $4.1 billion.

With the kind of results IBM is churning one quarter after another, Big Blue is running a very real risk of becoming a tech also-ran. IBM stock fell about 5% immediately after the earnings report to $142, just a notch above its 52-week low of $140.

Strategic Imperatives Impressive but Slowing Down

IBM’s Strategic Imperatives segment of Cloud, Business Analytics, and Engagement, on which the company is pinning its hope for a comeback, continues to be its only bright spot, but is beginning to show signs of slowing down. IBM did not break down the segment’s actual revenue numbers, but said revenue was up 17% with cloud revenue up 45%. IBM reported that total cloud revenue over the past 12 months clocked in at $9.1 billion, while cloud delivered as a service had a hit an annual run rate of $4.5 billion up from $3.1 billion a year ago.

Although the segment’s growth rate was impressive, it was quite a drop compared to 40% growth recorded during last quarter. In my IBM earnings preview, I had estimated that the segment would average growth of 25% or the full year and bring in revenue of $31.3 billion. But with the segment now slowing down, full-year revenue from the segment might only clock in at $29 billion. IBM estimates that Strategic Imperatives revenue will grow to $40 billion by 2018, and the company remains on course to exceed that target even at the current lower growth rate.

I had also pointed out that it would take 4-6 quarters or the segment’s growth to completely offset revenue declines from other segments. But with the segment growing slower than expected while the other segments continue contracting faster than expected, a more accurate time frame might be 5-7 quarters.

Dividend and Buybacks Remains Robust

IBM’s key attraction as an investment vehicle remains its robust dividend and share buybacks. Although IBM slammed the brakes on its share buyback splurge in 2014, its overall yield of dividends and buybacks remains pretty solid. The company said that it spent $4.7 billion in dividend payouts and another $4.0 billion in share repurchases over the past 12 months. IBM’s net payout yield (dividends + share buybacks) totaled a healthy 1.8% in the third quarter alone. IBM shares yield a solid 3.5%.

What to Expect of IBM Stock

The currency headwinds that have been wreaking havoc on IBM are bound to turn to a tailwind at some point in the future. But that will not completely stop the hemorrhage at the company, it will only slow it down somewhat. IBM’s Strategic Imperatives do have good potential to pull the company out of its revenue tailspin. Bold investors who are willing to wait for the company’s comeback plan to fully materialize should consider buying IBM stock now.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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