I have analyzed IBM's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.
The analysis uses gauges to assess how well the company satisfies seven specific investment criteria. GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied. An Overall Score between zero and 100, which takes all gauges into account, is also computed. While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms. An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.
First, a quick review of the company itself.
IBM was the first major technology company, and it became a colossus selling powerful (for the time) mainframe computers. IBM made early personal computers, but it sold that business to Lenovo in 2005 when IBM decided to focus on more profitable information technology services for businesses. Always a research powerhouse, the company developed cloud-computing and artificial intelligence services (e.g., "Deep Blue"). But, IBM has not come close to regaining the dominating market position it had with mainframes. IBM's annual revenue has been slowly declining for years. IBM took a big step towards repositioning the company around the "hybrid cloud" when it spent $34 billion to acquire Red Hat, a leading open-source software firm. However, the jury is still out on whether IBM can compete effectively against the giants of the cloud business, which include Amazon, Microsoft, and Google. In October 2020, IBM announced it would take a second restructuring step and spin off its managed infrastructure services unit. The business to be divested into a new public company is now part of the IBM Global Technology Services division, and it brings in revenue of about $19 billion per year.
IBM recorded profits of $6 billion, $6.22 per share, on revenue of $74 billion during the last 12 months. In the quarter that ended on December 31, 2020, IBM earned $1.51 per share on a GAAP basis, and it gained $2.07 per share after non-GAAP adjustments and exclusions. See IBM's most recent quarterly report and my review of their results relative to expectations for additional information.
Shares of IBM now trade for about $121 each, giving the company a market value of $109 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.
Analysis Results:
IBM's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments
1. The Company's Size is Substantial: GREEN
Market Value: $108.7 billion (mega-cap)
2. The Company is Conservatively Financed: RED
Current ratio = 1.0 (>2.0 is conservative)
Long-term debt/Equity = 262% (<100% is conservative)
3. The Company Generates Stable Earnings: GREEN
Nineteen positive quarterly earnings reports in last 5 years (almost perfect)
Earnings variability = 15% (modest)
4. The Company Exhibits Earnings Growth: RED
Owner Earnings growth rate (trailing year) = -39% (poor)
Owner Earnings growth rate (five-year average) = -6% (poor)
Free Cash Flow growth rate (trailing year) = 25% (very good)
Free Cash Flow growth rate (five-year average) = 2% (weak)
5. The Company is Efficiently Profitable: GREEN
Cash Flow Return On Invested Capital = 22% (good)
Operating Profit/Sales = 8.4% (okay)
6. The Company Pays a Healthy Dividend: GREEN
Dividends paid for the last 7 years or longer
Dividend 5-year average growth rate = 4.3% (weak)
Dividend = 37% of last year's FCF (easily sustainable with room to grow)
7. The Company's Shares are Fairly Valued: YELLOW
Price/Owner Earnings (last year) = 16.9 (moderate to pricey)
Price/GAAP Earnings (five-year average) = 13.5 (appealing)
Free Cash Flow/Market Value = 14.3% (very appealing), more than the five-year average of 10.3%)
Acquirer's Multiple = 25.3 (very expensive)
Price/Book Value = 5.2 (less expensive than the five-year average of 7.2)
Price/Sales = 1.5 (less expensive than the five-year average of 1.7)
In summary, the analysis assigned IBM four GREEN, one YELLOW, and two RED grades. The resulting Overall Score is 56 of the 100 possible points, which is a good, but not quite high enough result. The score is below the 60-point GCFR threshold, and, therefore, IBM does not satisfy the GCFR criteria for investment consideration at this time.
The share price would theoretically have to fall by 14.8 percent, from $120.91 to $102.99, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that IBM's future results will push the score up (or pull it down). Revisit GCFR2 occasionally for updates on IBM's performance and the latest GCFR gauges and scores.
This analysis reported here is a limited evaluation of the subject company. It does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent. Readers are strongly encouraged to verify all data and perform their own independent analyses. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.
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#ibm #gauges #gcfr #gcfr2 #valueinvesting #nac_financialanalysis
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