Stock of the Week
NYSE Symbol: IBM
Industry: PCs, Software, Services
Price as of 7/22: $127.47
The earnings season continues with better than expected reports, but investors remain on the sidelines due to the constant change in Washington and concerns of a slowing economy. In the last week we have witnessed a number of companies easily beating estimates and then watched as their stocks got hit. Finally on Thursday of this week we may have witnessed a break out in the averages as companies like 3M, Caterpillar, and UPS easily beat estimates and then raised guidance. This week we'll feature a blue chip company that reported great earnings on Monday, raised guidance for the year, and yet the stock dropped over 4%. The featured stock of the week is IBM. Short term the stock is under pressure, but long term the fundamentals are bright. Case in point, IBM in an analyst call back in May laid out plans to expand earnings to $20 a share by 2015. With a PE of 10 that would send IBM's stock up to $200 a share, or 57% from present levels. This week mutual fund manager, Bill Miller said blue chip stocks are as undervalued as they have been since 1951. We featured a number
of blue chips two weeks ago that trade for 10 to 11 times earnings and yeild 2-3% or more. This week, investors are getting a similar opportunity to take advantage of short term concerns that are providing a long term opportunity in a blue chip that will go ex-dividend within the next month.
Monday night, IBM reported a 9% rise in net income to $3.39 billion, or $2.65 per share, beating estimates by 3 cents. Revenue in the latest period rose 2% to $23.7 billion, from $23.3 billion. That was below the $24.2 billion that analysts expected, however, the miss was due to currency flucuations. Cost cuts and stock buybacks are an important way IBM boosts its' profits. Eight cents out of the 29 cents per share improvement in IBM's second-quarter income came from buybacks. The second quarter was the 30th straight quarter in which IBM has posted higher earnings per share than the year before. IBM's new guidance for 2010 calls for net income of at least $11.25 per share, an increase of a nickel per share over the previous estimates. That reflects IBM's confidence that it can wring more profits from its workhorse services and software divisions and from the rollout of a new mainframe. Still, it was short of the $11.27 per share that analysts were expecting. However, as mentioned IBM believes they can make $20 a share in earnings by 2015 with double digit growth of 10%-12%.
Currently, IBM is trading for 11 times this years earnings, and 10 times next years earnings. The stock sports a 2% yeild and goes ex-dividend the first week of August. Following earnings, UBS reiterated a price target of $142 a share. Following their May conference call, Collins Stewart reiterated their buy rating and a $160 target on IBM. IBM is not a flashy stock, but a blue chip with great long term potential with a nice dividend.