IBM (NYSE: IBM) – An In-depth Stock Analysis

by 036Gooddaysir036

Introduction:

Good evening everyone. This post will be an in-depth look at IBM, and is likely going to end up being a bit lengthy. The stock is in a bit of a weird position, there is no doubt there will be people on both sides of the fence when looking at this stock. First we will take a look at the business for those unfamiliar, then the financials, and lastly their potential road ahead.

There will be a few questions we are looking to answer:

  1. Is there revenue growth?
  2. Is there earnings growth?
  3. Is the company really leveraged? (Low/High debt)
  4. Is there strong cash flow?

IBM – International Business Machines:

International Business Machines’ mdel is to be a part of everything IT’s enterprise needs. The company primarily sells:

  • Infrastructure services (37% of revenue),
  • Software (29% of revenue),
  • IT services (23% of revenue),
  • Hardware (8% of revenues).

IBM operates in 175 countries and has over 80,000 business partners to service 5,200 clients – which includes 95% of all Fortune 500. IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

Strengths:

– The company has been able to use its large free cash flow to invest heavily in the future (R&D and acquisitions) as well as buy back significant amounts of its own stock. Additionally the cash flow is allow the company to transition its larger customer base from old lower margin businesses to new higher margin, higher growth products and services.

– The company consistently tops the annual list of U.S. patent beneficiaries.

– The acquisition of Red Hat is transforming the company toward new Cloud technology.

Risks:

– IBM’s old mainframe business is in a long term decline. As we will see in the next section, over the last 10 years the company’s Revenue growth is negative, Cash Flow from Operations (CFO) is barely positive.

– While the stock share buybacks were listed as a positive, they are also a negative. IBM’s Earnings Per Share (EPS) is only positive because they bought back so many shares.

– And most importantly, data and analytics businesses face fierce competition from corporations such as Amazon, Microsoft, and others.

Financial History:

There is going to be a lot to unpack here, let’s look at the general trend here.

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Year Revenue EBITDA Debt Debt / Earning
2011 106,916 26,361 27,163 1.0
2013 98,368 27,478 29,680 1.4
2015 81,741 20,372 38,702 1.9
2016 79,919 18,551 40,902 2.2
2017 79,139 16,223 45,086 2.8
2018 79,591 16,711 42,656 2.6
2019 77,147 16,844 66,883 4.0

The revenue has decreased approx 4% each year over the last decade, earnings has also decreased down to $16 Billion while their debt has ballooned to over $66.8 Billion setting the current debt/earnings ratio to 4x…big ouch.

Looking back at the first chart there are two things that need to be pointed out. Firstly, the decline in revenue and EBITDA has been leveling out, from 2017-2019 we can see there hasn’t been as much of a decline. Secondly, the ballooning in debt in 2019 is attributed to IMB acquiring Red Hat.

So let’s answer some of the questions.

  1. Is there revenue growth? – No
  2. Is there earnings growth? – No
  3. Is the company really leveraged? (Low/High debt) – Lots of Debt
  4. Is there strong cash flow? Hmmm.

This is where things are going to get interesting. and less gloomy. (But it is still gloomy)

Year Cash Flow from Operations Capital Expenditures FCF/E Ratio
2011 19,846 4,108 16,787
2015 17,225 3,579 13,594
2019 14,770 2,286 31,365

What is really interesting, and a little weird here is they are generating ~$15 Billion in cash flow, and only putting ~$2.3 Billion back into the company, leaving around $12 Billion of free cash flow. When we look at their Free Cash to Equity we can see this has sharply rose, despite declining revenue and earnings.

At the current stock levels the free cash flow yield over the last decade has been ~11%. So if they can continue to stop their decline, or even turn around at this point there could be strong profit potential.

Let’s quickly look into where the money is coming from.

Revenue:

Revenue Sector 2018 2019 Year-Year Change
Cloud & Cognitive Software 22,209 23,200 +6%
Global Business Services 16,595 16,634 +2.4%
Global Tech Services 29,146 27,361 -3.7%

Looking at only the top 3 of their revenue sectors, we can see their Cloud & Business services growing at ~8.4% combined, and their Tech dropping by 3.7% from 2018 to 2019. This is potentially promising and their new CFO and CEO are investing heavily into this Cloud services. From their prospectus they are projecting potential 60% growth revenue models.

This also does not take into account the potential from their Red Hat acquisition.

So what’s the big if?

The big “IF” is whether or not they can turn the business around from where it is currently at or if it will just continue to decline. The earnings/revenue/debt numbers look terrifying right now, but strong cash flow is what allows companies to survive into the future. If IBM can increase their revenue and earnings, pay down debt, and maintain or increase their current cash flow there is a potential for a strong return.

Some other numbers:

NOTE: Current for November 2020 and very likely to change.

Current Annual Payout / Share $6.52
Yield 5.84%
10 Yr Div Growth Rate 11.6
3 Yr Div Growth Rate 5.3
1 Yr Div Growth Rate 3.5
Current EPS Payout Ratio 72.77%
Years on Consecutive Div Increase 25 Years

As it stands right now, the company is remaining committed to the dividend payouts. They currently have the cash flow to support it, however the payout ratio is already 72%. To maintain this their revenue will need to increase in the coming years.

Final Thoughts:

IBM has been beaten down and currently sits in an interesting position. It is a global behemoth of a company with a wide moat, it is very intertwined in many different services, yet, over the last decade, it has languished financially under their previously poor leadership.

Picking this up, maintaining your current position, or staying far away depends on your personal risk tolerance. They have been declining, but the decline has slowed. Their growth in the Cloud sector is becoming more profitable, but it has many competitors there. There was a change in upper leadership. They have high levels or debt, but high levels of cash flow. So much is going on. (They are also involved in crypto – Stellar Lumens for those interested in that, won’t be talking about it in detail here)

Ultimately, you need to ask yourself, do you believe in this company?

I hope everyone found this post interesting, please supplement this with your own research. What is everyone’s opinion about the company?

As always, thanks for reading, and have a good day/night!

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.