International Business Machines (IBM) is an information technology and consulting company, which provides integrated solutions and services worldwide.
It operates through the following segments: Cloud & Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing. It was founded in 1911, and is headquartered in New York.
Shares of IBM have marginal gains of about 6.4% in 2021, but IBM stock has been underperforming by far the Dow Jones gains of 18.8% year-to-date.
I am bullish on IBM stock, despite a lack of momentum in sales growth. Other than an attractive dividend yield, the stock is now trading at an attractive price and for contrarian investors, the stock may perform well in 2022. As Dow Jones nears its all-time highs in 2021, and in the event of sell-off underperformers and stocks that have been out of favor for a full year such as IBM may face little selling pressure.
IBM Business News
In 2021, and specifically on November 3, IBM completed the separation of Kyndryl (KD) into an independent publicly traded company. Holders of IBM common stock received one share of Kyndryl common stock for every five shares of IBM common stock they held as of the close of business on the record date, October 25, 2021.
This transaction had no impact on the number of shares of IBM common stock investors owned, and IBM announced that it expects the distribution of Kyndryl common stock to be tax-free to holders of IBM common stock for U.S. federal income tax purposes.
According to Arvind Krishna, IBM’s chairman and chief executive officer, this business separation was the result of a focus on shifting focus to hybrid cloud and AI, while at the same time making efforts to improve IBM’s financial profile.
The latest notable news includes a semiconductor innovation.
“IBM and Samsung Electronics jointly announced a breakthrough in semiconductor design utilizing a new vertical transistor architecture that demonstrates a path to scaling beyond nanosheet, and has the potential to reduce energy usage by 85 percent compared to a scaled fin field-effect transistor,” read a company release.
Q3 Earnings
IBM’s Q3 earnings were a beat on EPS and a miss on revenue. Refinitiv analysts expected EPS (adjusted) of $2.50 per share and revenue of $17.77 billion.
The actual results were EPS of $2.52, and revenue of $17.62 billion. Net income of $1.13 billion was 33.5% lower year-over-year. On the positive side, IBM reported net cash from operating activities of $16.1 billion and adjusted free cash flow of $11.1 billion, both up $0.3 billion over the last 12 months.
Cloud & Cognitive Software cloud revenue was up 31%, Global Business Services cloud revenue was up 30%, and Red Hat revenue was up 17%.
The total cloud revenue over the last 12 months of $27.8 billion was up 14%.
In GAAP results, IBM year-over-year reported declines in key financial metrics. Diluted EPS fell 34% to $1.25, net income fell 33% to $1.1 billion, and gross profit margin fell 1.6 points to 46.4%.
It is important to note that these negative results, as per IBM, included the impact of Kyndryl separation costs.
Other Metrics
The forward dividend yield of 5.3% is very attractive. The technology firm reported modest revenue growth and delivered solid free cash flows. In Q3 2021, free cash flow reported was$ 2.16 billion — an increase of 4.36% compared to free cash flow of $2.07 billion in Q2 2021.
Data taken from Simply Wall Street shows that BM is good value based on its P/E Ratio (23.7x) compared to the U.S. IT industry average (36x).
However, reasons to be concerned are the high level of debt, as the net debt-to-equity ratio (206.2%) is considered high, and current net profit margins (6.3%) are lower than last year (10.5%).
It will be important over the next few quarters to see improvements in key financial metrics to perhaps justify a turnaround.
Wall Street’s Take
Turning to Wall Street, IBM has a Moderate Buy consensus rating, based on five Buys and three Holds assigned in the past three months. The average IBM price target of $155.16 implies 23.2% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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