The Razor’s Edge
2-Year Price History
Recent Price
(2/6/2009)
$96.14
52-Week Price
$69.50 – $130.93
Market Capitalization
$129.2 Billion
Most Recent Dividend
$1.90
About International Business Machines Corp.
International Business Machines Corporation is considered to operate in the Technology
sector. They specifically operate in the Diversified Computer System
business segment contained within the Computer Hardware industry.
The Company is a globally integrated enterprise that targets the intersection of technology and effective business in software and services.
Ockham’s Rating
We are reaffirming our Fairly Valued rating for the time being because there have been no major changes in our analysis in the last week. In the following report we will look at the stock versus itself historically, which is clearly useful in order to evaluate if a security is overvalued or undervalued. In addition, we analyze the stock as a member of the Technology sector and the market as a whole to understand the volatility and risk and reward potential.
What can you say about this market? No one likes to see the market going down so rapidly, but in times like these value investors should be cautiously opportunistic, as the market’s decline has certainly uncovered some great bargains. We are simply reiterating IBM’s Fairly Valued rating as of this week, as IBM’s sector has resisted the downturn to some extent. Our analysis of this stock is little changed since last week’s report, but please continue reading for further justification of our Fairly Valued rating.
It is often helpful to begin our analysis with recent price changes, the price of IBM rose from $91.65 as of 01/31/2009 to a price of $96.14 as of 02/07/2009. While this increase of 4.90% was not large enough for Ockham to downgrade the stock, it does however slightly lessen the attractiveness of IBM.
As of this report, there have been no meaningful adjustments in cash earnings expectations or guidance in the last week.
IBM Stock Evaluation
We are reiterating our rating of Fairly Valued on IBM at this time. As described in the Recommendation Summary, we have not seen any additional guidance or change in expectations to IBM’s earnings, but we have seen a relatively significant increase in its share price of 4.90%. This increase in price is significant and should be noted as we look further into the fundamental picture of IBM below.
IBM Revenue
As a value investing shop, we are interested in seeing how IBM’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 1.45x and the low end of the range at 0.97x.
With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for IBM of 1.19x is slightly under its historical average. This level of Price to Sales gives us a fairly neutral position on the IBM shares. We would like to see a drop in the Price to Sales ratio just a little bit more (given current sales figures) before we would become more positive on a Price to Sales basis. Such a drop would increase the attractiveness of the stock but, as always, would need to be considered in the context of all other valuation factors.
IBM Cash Earnings
Looking at IBM specifically in their Cash Earnings capabilities, Ockham views IBM as below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from IBM. For example, IBM’s Cash Earnings ratio per share has fluctuated between 6.70 and 10.14 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where IBM is with respect to prior business periods.
So what does a Cash Earnings ratio below the historical norm mean for IBM? Generally, IBM’s investors have paid slightly higher stock prices for this level of Cash Earnings, which bodes well as a return to historical norms is statistically likely. However, it is never a guarantee that history gives us proper direction, particularly in fluctuating market cycles. So by utilizing a long term view and incorporating other areas of analysis (like Sales, Dividends, and management analysis), each investor can gain a more complete view of IBM. Remember, that the average Cash Earnings level for IBM has been 8.42, so the current Cash Earnings level of 7.17 is a positive in our view, but by no means is it overwhelming.
IBM Dividends
A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company’s inherent expectations.
Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from IBM against the historic high and low levels over an available data range. Because IBM has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In IBM’s case, the estimated annual dividend is $2.00 producing a current dividend yield of 2.08%. The highest dividend yield from IBM in recent history was 2.88% while the lowest dividend yield was 0.38%. IBM’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 27.61% above the median which weighs very positively on our analysis of IBM.
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