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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


August 29th 2013 IBM
NYSE Symbol: IBM
Industry: IT Servicing
Price as of 8/29: $182.16

With the summer winding down and all the bulls in the Hamptons, the markets have fallen into a 5% correction. Name your excuse the Fed Tapering, another Fed Debt Ceiling, and pending military attacks in Syria. The concerns in the Middle East have lifted the price of oil and that beaten down sector. Bonds have rallied modestly, but inevitability, the equity markets were due for a pullback after a phenomenal run this year. Investors should be making their list of stocks to buy. Oil should continue to perform well in the short and long term. Technology is another good bet for the rest of the year. This week we'll highlight a blue chip (the original blue chip) tech stock trading at a new 52 week low. The stock of the week is IBM. IBM has been a darling since the 2008 lows rallying 200%. However, the stock has since been in a tight range between $215 and $180 a share for the last two years. This week, the stock is back toward $180 a share or a two year low. While the broader market is trading for 14 times earnings, IBM is trading for 10 times earnings and 2 times sales. Just this week one insider bought more stock and the last time the stock was this low, Warren Buffet was a buyer. In a market with a number of stocks trading at lofty valuations and at all-time highs, it's nice to find a blue chip stock well off it's' highs trading at a compelling valuation.

Back in the middle of July, IBM reported better than expected earnings. Excluding a $1 billion restructuring expense, profits came in at $3.91 a share easily beating estimates of $3.78 a share. IBM now expects to earn at least $16.90 a share in 2013, up from the $16.70 forecasted earlier this year. By beating earnings estimates, IBM has rebounded from a rare stumble in the previous quarter, when its profit missed projections for the first time in eight years. Revenue continued to decline, falling 3.3 percent to $24.9 billion from a year earlier. Analysts had expected $25.3 billion. Sales declined in every IBM business division other than software. In addition to a slump in demand, currency changes took a toll on IBM's results last quarter. In Japan, where the company made about 10 percent of its sales last year, the yen fell 5 percent versus the dollar in the second quarter. The company was "significantly impacted" by the yen's weakness, Chief Financial Officer Mark Loughridge said on a conference call. IBM has managed to increase profit by shifting away from low-margin businesses, cutting jobs and repurchasing stock. The company is betting that faster-growing areas such as cloud computing and data analysis can offset a broader slowdown in information-technology spending. IBM ended the quarter with $10.36 billion in total cash and marketable securities, compared with $11.99 billion in the previous quarter. At the end of the second quarter, total debt was $34.10 billion compared with $33.40 billion in the prior quarter. IBM reported cash flow from operations (excluding Global Financing receivables) of $3.6 billion versus $2.4 billion in the previous quarter. In the reported quarter, IBM generated free cash flow of $2.7 billion, significantly up from $1.7 billion in the previous quarter.

IBM valuation is cheap among the blue chip techs. IBM trades for 10 times earnings, 2 times sales, with a 2% dividend. Thanks to strong cash flow, IBM has been able to pare down its' debt while also buying their stock back along with hiking their dividend. IBM has a goal to reach $20 in earnings per share by 2015. The last time IBM's stock was in the $185 range, Warren Buffett was buying the stock. I wouldn't be surprised if in next quarter's filing to hear that Warren Buffett added to his position in IBM.