Today we look at IBM, whose shares have declined in the past year. In our view, this makes IBM a value stock with the potential for significant gains. In business since 1911, the company has successfully adapted to changing conditions in business and technology over the past century. It is currently adding to its capacity in the fast-growing areas of cloud-computing, mobile and analytics, including analytic software for the “Internet of Things.” In the meantime, IBM has rewarded investors with dividends since 1967 and has raised its dividend for each of the past 20 years. It now yields 3.9%.
IBM (New York symbol IBM; www.ibm.com) continues to transition from selling mainframes and consulting services to high-growth areas like cloud computing and analytics software, which processes huge amounts of data.
IBM has successfully shifted from unprofitable businesses to fast-growing ones in the past, but investors remain cautious of the latest changes in a time of rapidly evolving technology and customer demands. That’s why the shares trade at just 9.5 times IBM’s forecast 2015 earnings.
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In the three months ended September 30, 2015, the company’s revenue fell 13.9%, to $19.3 billion from $22.4 billion a year earlier. Revenue from cloud computing and analytics jumped 27%, but consulting and mainframe sales fell.
The company earned $3.34 a share in the latest quarter, down 9.2% from $3.68.
Even so, IBM’s recent cost cuts are improving its efficiency: its gross profit margin improved to 50.0% from 49.2%. That’s freeing up cash for acquisitions, share buybacks and dividends: free cash flow (cash flow minus capital expenditures) rose 17.3%, to $2.6 billion. The quarterly dividend of $1.30 yields 3.9%.
Value stocks: Two deals expand cloud computing services for IBM
IBM updated its mainframes this year, which should help boost its sales. New offerings in faster-growing areas, like cloud computing, mobile and analytics, should also spur its results.
As part of its plan to expand cloud computing operations, IBM is setting up a new division to develop software that can analyze data from a variety of Internet-connected devices, including smartphones, tablets, vehicles and appliances. This "Internet of Things" could total over 30 billion devices by 2020. Tapping into the information they generate will help IBM’s clients improve their products and make better decisions.
Earlier this year, IBM made two deals that added to its cloud computing services. It paid an undisclosed sum for Seattle-based Blue Box Group. This privately held firm’s software and patents will help IBM with its plan to offer hybrid cloud services, which combine the convenience of cloud-based programs with secure local data storage. Demand for hybrid systems is strong, as they are cheaper and more flexible than regular cloud platforms.
IBM also formed an alliance with Box Inc. (New York symbol BOX), which sells cloud-storage services to businesses.
Under the deal, IBM will develop programs that combine its analytics software with Box’s cloud-based data. It will also integrate some of Box’s programs with its business email and online collaboration services, and Box’s clients will gain access to IBM’s consultants and online security technologies.
Teaming up with Box should help IBM compete with cloud-computing providers like Amazon.com and Oracle.
We still think IBM’s latest business transformation will be a success.
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