International Business Machines Corp. (IBM, Financial) is likely one of the most ubiquitous stocks on Wall Street. It’s got a spot in virtually every equity-traded investment vehicle, including stock portfolios, mutual funds, index funds and exchange-traded funds.
In fact, anywhere you look, Big Blue likely is there.
This week’s second-quarter reports confirmed for a number of investors, including an assortment of gurus, that the company indeed deserves their attention. The company exceeded analysts’ expectations, reporting earnings of $3.08 per share, 4 cents above the forecast. Taking center stage was a 20% to 23% growth in IBM’s cloud revenue, which hit $18.5 billion in the second quarter. A part of that success, analysts say, are new cloud comptuing service deals with mega-players like Exxon Mobil (XOM, Financial), Telefonica (TEF, Financial) and Amtrak. In addition, the company holds about 8% of the global market share in cloud infrastructure services, according to Synergy Research Group.
As a result, the computer giant saw a price pop of more than 2%. In trading on Friday afternoon, however, shares were down 1.7% to $146.71, adding fuel to skeptics’ concerns that Big Blue isn’t likely to stage a comeback as a big player in the tech industry anytime soon. The company in recent years has reported negative earnings growth, declinining revenue per share and slumping operating margins.
But fans are often quick to point out a dividend yield that rivals competitors. IBM yields a 4.14% dividend, which beats that of 90% of 1,400 competitors in the Global Information Technology Services Industry.
Buffett’s out
Loyalists like Warren Buffett (Trades, Portfolio) pulled out of IBM this year.
The “Oracle of Omaha” sold out of the computer giant in the first quarter of the year after sticking with it for many years. Buffett sold as many as 81 million shares at a time when the company's shares sold, on average, for $175 a share, which exceeds its current 52-week high of $171 a share.
The IBM stake had become one of Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) largest, along with Coca-Cola (KO, Financial) and American Express (AXP, Financial).
Declining margins
The computer giant has a Pitrioski F-Score of 7, which reflects very healthy business operations.
While investors like its dividend, however, IBM has a lot more to prove before it claim its former role as an industry leader. Some of its key metrics reflect the stagnation that over the years has taken hold.
It can be seen, for example, in analysts’ forecasts. Its trailing 12-month revenue was reported at $80.7 billion. Analysts don’t see revenue inching any higher than $80.3 billion through 2020.
A look at earnings also paints an agonizing portrait. In the last decade, the company’s earnings have averaged 2.4% a year. Over the last five years, the average has been -6.7% a year and over the last 12 months, IBM reported an earnings growth of -7.3%.
GuruFocus identified an assortment of severe warning signs that will not make it an easy comeback. Gross and operating margins have been on the decline over the last five years. Operating margins, in particular, have been at an average rate of decline of -7.5%.
Over the last year, the company’s profits have dropped while its revenues have also been faltering. Investors also need to note that the company has issued $7 billion in debt over the last three years. Overall, GuruFocus indicated the debt was sustainable at current levels.
GuruFocus also suggested it is paying a dividend that it cannot sustain over the long haul. At a payout of 0.98, the dividend seems too high.
GuruFocus ranks the company's financial strength 6 out of 10 and its profitability and growth 5 of 10.
The median price-sales chart by GuruFocus suggested the stock is trading near or at historical value.
Signs of life
Big Blue has an attractive price-earnings ratio of 23.50 times, which is higher than 54% of its competitors in the Technology Services industry. It also is trading at 10.79 times forward earnings. Its price-book ratio is 7.26, which is lower than 80% of its competitors, and a price-sales ratio of 1.67, which is higher than 60% of its peers.
A number of other legendary investors hold shares. In the second quarter, guru Ken Fisher (Trades, Portfolio) bought shares of the company. Other shareholders as of the second quarter included: Jeremy Grantham (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Prem Watsa (Trades, Portfolio), John Buckingham (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Tom Gayner (Trades, Portfolio).
The stock has a market cap of $134 billion.
