Big Blue's big problems create a buying opportunity
IBM's recent performance stumble has investors rightly worried, but formidable strengths in several long-term growth areas bode well.
After Big Blue's most recent quarterly results missed analysts' estimates for the first time since 2005, several brokerages slashed their price targets on IBM's stock. And indeed, the shares have sputtered, tumbling about 5% over the past three months amid a broader market rally.
Those results gave investors plenty to worry about. IBM's services business, long a cash cow, saw its revenue decline 4%. Software was little changed, and hardware slumped a brutal 17%. This presents some serious challenges for CEO Ginny Rometty as she tries to right the company's ship.
First, customers now know IBM is vulnerable and likely will ask for -- and get -- steep discounts. Those that don't get the deals they want from IBM will have no trouble getting them from rivals such as Hewlett-Packard (HPQ) and Dell (DELL).
But IBM has some remarkable strengths.
It stands to benefit from the boom in cloud computing, where its business grew by 70% in the last quarter. Its Smarter Planet division, which provides software and services to manage energy consumption and traffic, gained more than 25%.
IBM also is keeping a close eye on the bottom line. It’s reportedly trimming about 8,000 employees from its global workforce, including about 1,300 in the U.S., and is taking a $1 billion charge.
More layoffs and cost-cutting may be coming because this round didn't do much to spur interest in the stock. Negative sentiment on IBM, though, appears to be overblown.
Like most big companies, IBM will benefit from the improving economy, particularly for financial institutions because they're among its biggest customers.
The average 52-week price target on IBM is $221.9, about 9.5% higher than where it currently trades. The shares now carry a price-to-earnings multiple of 13.8, under the five-year high of 14.08. And IBM pays a dividend.
It offers the potential for low risk and high reward. Odds are strong that the company will be back in Wall Street’s good graces before too long, making now the time to buy the stock.
Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
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Why are stronger numbers considered bad news? Investors are worried about the impact on inflation and interest rates.
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