Is IBM a Good Investment Despite Weak Results?

International Business Machines (IBM) recently announced its third quarter results. The company posted revenue of $19.3 billion, down 1.4% year-over-year and 7% sequentially. IBM’s operating earnings came in at $3.34 per share, down 9.2% from the year-ago period.

Importantly, despite the weakness, IBM delivered more than $2.5 billion of free cash flow during the quarter and strategically lowered its share count by about 2% to 3% annually. The company is focused on expanding its top and bottom line growths through increased exploration of cloud, mobile and security platforms.
But, will these strategies work? Let’s find out.

A strong cash position makes IBM shareholder-friendly

Going forward, IBM expects to generate net income or free cash flows of approximately 90% and return nearly 75% to 85% of free cash flows to its stakeholders over a longer-term through dividends and share repurchase programs. This growth will be driven by IBM’s top line growth, which will help it generate significant cash flow and returning a majority of the invested capital to its stakeholders through share buybacks and in the form of dividends.

Joseph Foresi of Cantor Fitzgerald has reiterated a “Hold” rating on IBM with a target price of $148, driven by the fact that the company’s shares have fallen 12.32 percent since the last quarter from a notable $173.22 as of July 20, 2015. Moving ahead, IBM is expected to have 1 percent weakness and it needs to strengthen its major business and get back to profitability for the key stock to witness a rise.

However, a majority of the key investment analysts do not expect an impressive performance by IBM, given weaker customer traction for its portfolio of new and innovative software products which is expected to drive only satisfactory company growth.

But, IBM has several growth markets such as cloud, mobile and security business segments. Further, the key partnerships of IBM with Apple, SAP, Facebook, Twitter, Tencent and Box have delivered notable company growth. IBM’s strategic portfolio of solutions allows a wide platform for expanding businesses. Going forward, IBM’s unique imperatives are forecasted to grow to approximately $40 billion by 2018.

Conclusion

I think that investors should hold their position in International Business Machines Corporation looking at its debt-burdened balance sheet with significant total debt of $38.67 billion as against a weaker total cash position of $8.76 billion only, restricting the company to make investments for growth.

However, IBM has a strong valuation with trailing P/E and forward P/E ratios of 13.13 and 9.30, respectively, which is lower than the industry’s average P/E of 17.97. But, I think that investors should adopt a wait and watch approach before investing in IBM and wait for its performance to improve in the long run.
Published on Oct 23, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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