Inside Wall Street: IBM gets more attractive

The stock's steep fall on unspectacular, disappointing quarterly results make IBM more undervalued.

By Gene Marcial Oct 24, 2012 5:12PM

Image: Circuit Board -- Datacraft Co Ltd, imagenavi, Getty ImagesAfter the big jolt it gave shareholders, is it time to dump Big Blue? Don’t be silly!


Although shares of IBM (IBM) have been among the hardest hit after the tech giant and a bunch of other major technology leaders, including Microsoft (MSFT) and Google (GOOG), last week reported disappointing results for the latest quarter, checking out of IBM would be a huge mistake. (Microsoft owns and publishes Top Stocks, an MSN Money site.)


Big Blue's positive image on the Street, despite the quarter's shocking numbers, remains intact as most analysts are sticking with their bullish outlook on the stock.


Dylan Cathers of S&P Capital IQ, who continues to be upbeat on IBM, expects the stock to hit new-high levels. Although the analyst acknowledges near-term concerns about the company's revenue growth given a difficult market for information-technology products, his confidence in IBM is unshaken.


"Our 'buy' recommendation reflects our confidence in IBM’s diverse business model and financial strength," says Cathers.


"Healthy margin gains in the majority of IBM's segments will help drive earnings per share, as will a robust share buyback program," he argues. And a dividend yield of 1.5% adds to the stock's appeal, says the analyst, who believes the stock will surpass its 52-week high of $211.79.


Cathers is staying with his 12-month price target of $227 a share. The stock dropped to $190 a share Wednesday, way down from $211 just a week ago, when the disappointing third-quarter numbers from the tech majors started to surface.


Look for operating margins to widen above 19.5% this year, says Cathers, compared with 19% in 2011, which reflects ongoing cost reductions efforts, productivity gains, and an improved sales mix.


Most of the analysts who continue to be bullish have fine-tuned or tweaked their earnings and revenue forecasts for IBM for the fourth quarter while maintaining long-term estimates.


Ben Reitzes of Barclays Capital, a bull who rates the stock as overweight with a 12-month price target of $240, has trimmed slightly his 2012 earnings estimate to $15.14 a share from $15.18, based on a year-to-year revenue decline to $104.6 billion from $105.2 billion.


But he is keeping his earnings forecast for 2013 of $16.75 a share based on a projected 3% year-to-year revenue growth to $108 billion, and his 2014 estimate of $18.45 based on a revenue jump to $111.5 billion.


He notes that although revenue was weaker than expected in what he describes as a "product transition quarter," IBM is still set up for fundamental improvement over the next several quarters. That will be helped, says Reitzes, by several new hardware products and software solutions. And on IBM’s outlook for the longer term, he believes IBM can benefit from "the dislocation in the sector and its unique focus on analytics." The analyst's overweight rating on IBM, says the analyst, reflects a near-term upside driven by a "new mainframe cycle helping the company achieve long-term earnings of over $20 a share in 2015." 


His price target of $240 a share is based on 15 times his 2014 earnings estimate of $18.45 a share which, he says, represent a market premium. And if all goes as projected with his scenario and forecasts, Reitzes believes IBM's stock could climb to as high as $280 a share, based in part on his 2014 earnings forecast.

Gene Marcial wrote the column “Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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Oct 25, 2012 8:49AM

IBM is a buy after the election but don't buy this guy stuff....he's dangerous....


Which Romney will we see today on tv, the real one or the flip flopper ?????

For War against War, for women against women, for middleclass against middleclass, for coal against coal, for medical reform against medical reform.

A real shape shifter, a chameleon. America wake up to this guy he been an opportunist all his life !

Oct 31, 2012 12:51PM
Looks like 100 million in Insider stock of FB was "disposed off" on 10/26 before the rank and file got to sell theirs.

How does that feel to you rank and file FB employees ?
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