Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Using a Value Line Report: Is IBM an Expensive Buy?
Looking at shares of International Business Machines (IBM - Free IBM Stock Report), at first blush, the stock price (about $186 as of the date on this report) may appear a bit lofty. However, in the world of investment analysis, due diligence must be employed to scratch beneath the surface in order to determine a company’s true or intrinsic value, as well as the equity’s potential for capital gains. Our subscribers can use the Value Line report to evaluate both of these factors with veritable ease.
Considering that IBM is one of the largest and most world-renowned technology giants, which was instrumental in the evolution of the computer hardware industry, it is fair to expect this company to command a premium. Hence, it is not surprising that the shares trade well above their tangible book and enterprise values. These values can be determined with reasonable accuracy by looking at the book value per share (minus intangibles; found in the footnotes) in the Statistical Array, the market capitalization, the common and preferred shares, which are located in the Capital Structure box, and the cash assets found in the Current Position box. Taking these factors into account, one might be compelled to deem these shares pricey. Still, this does not mean that the stock is not a good investment, even at the recent quotation. That assessment would be more appropriately based upon the specific investor’s needs.
A glance down at the Ratings box reveals several performance metrics that ought to entice investors who may be looking for a solid blue-chip play for long-term growth in the technology sector. Many would argue that IBM is, in fact, an essential buy-and-hold component to any portfolio seeking core exposure to the tech industry. Indeed, its Financial Strength rating of A++ is superlative, while its marks for Stock’s Price Stability and Earnings Predictability speak volumes to support the equity’s top-notch quality and financial condition. This notion is most aptly supported by the stock’s Safety rank of 1 (Highest), which is fittingly located in the Safety Rank box at the top left hand corner of the page. Although IBM’s score for Price Growth Persistence is slightly less impressive than the aforementioned measures, it is still near the top-quartile of the Value Line universe. Moreover, the stock’s impressive recovery and price gains during the years following the most recent recession, despite the sluggish economic conditions over that span, suggest that the company and its stock are well equipped to thrive going forward. In addition, it is worthy of note that the equity’s price performance in 2013 has been more favorable than its primary Dow competitors, namely Hewlett-Packard (HPQ - Free H-P Stock Report) and Microsoft (MSFT - Free Microsoft Stock Report). This is demonstrated in the Price Chart Graph.
Some other factors that should appeal to investors who may be considering IBM shares for their portfolios are the rising dividends and strong cash-flow growth. The company’s solid quick ratio of 1:1 further supports financial flexibility, while the aforementioned growth rates indicate a historical record of generating surplus income, as well as returning shareholder value. Looking at the Annual Growth Rates box reveals that IBM’s cash-flow, earnings, and dividend growth rates have been increasing over the past 10 years.
On the other hand, the question that may raise some concern among prospective buyers of these shares is whether this momentum is sustainable over the long haul. Analyst Theresa Brophy’s Financial Projections suggest that the aforementioned growth rates are likely to slow a bit over the next 3 to 5 years. Evidence to support this can also be found in the Annual Rates box. This is probably reflecting the likely impact from saturation and the effects of a gradually maturing sector, as well as market headwinds that face PC manufacturers across the board. Still, based on our projections out to late decade, IBM shares offer about average price appreciation potential.
Furthermore, there are other mitigating factors to consider here. The stock’s Timeliness rank has been recently bumped up to 2 (Above Average), which suggests that we expect the equity to pick up steam versus the broader market’s averages in the year ahead. Moreover, recent contract wins (especially its cloud computing deal with the U.S. Department of the Interior), a ramped-up acquisition strategy, and efforts to enhance operational efficiency may well accelerate the company’s performance over the long haul. Ms. Brophy states in the Analyst Commentary section that “The Company may have to push harder given the recent revenue shortfall, but it has a good track record in achieving its goals.” In addition, Ms. Brophy goes on to note that “The stock’s Safety rank of 1 (Highest) and worthwhile 3- to 5-year total return potential may appeal to conservative, patient investors.”
All told, we believe that, while this stock may seem a bit pricey to the naked eye, the current Price/Earnings Ratio - located in the Top Label (about 12 times 12-month earnings as of the date of this report and including recently released second-quarter earnings results) appears to be well below IBM's historical ratio, as well as its projected annual average over the next 3 to 5 years. Moreover, its brand awareness and reputation for innovation, as well as its strong financial performance record support this equity as a solid income generating, long-term investment choice.
At the time that this article was written, the author held no positions in any of the companies mentioned.