Could IBM be the "Buy" of a lifetime?

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IBM has been tossed into the wind.  Could it comeback?

International Business Machines (IBM) could become the largest part of my portfolio if the stock can get some legs. What I love about this century old tech company is that everyone on Wall Street has concluded they are dead money. Recall Microsoft (MSFT) and Cisco Systems (CSCO) had this fate up until earlier this year. For "Value Investors" (if there is such a thing anymore) IBM is the ideal candidate. It's P/E is at 10. Wow.

IBM's CEO Ginni Rometty is on the hot seat and receiving much of the blame for why the company sucks so bad. They are too late to the cloud, they are too big, nobody wants to buy servers anymore.  Ginni has these ideas of grandeur of how she turn Big Blue around. Problem is -- nobody believes her.  Ginni admitted defeat on the last conference call and the result was a new 52-week low for IBM shares. IBM's share price has barely ticked higher since then. Yesterday IBM closed at $161, a price level not seen since 2011.  Last month Ginni said this and the stock tanked 8%:

"We are disappointed in our performance," says CEO Ginni Rometty. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."

 "We again performed well in our strategic growth areas cloud, data and analytics, security, social and mobile - where we continue to shift our business. We will accelerate this transformation."

Translation: I'm sorry we are doing so shitty and please believe me that our new business plan will make money. 

Ginni is in a horrible position. Inheriting problems that were set in course long before she took the helm. Wall Street said "no thank you Ginni, we'll buy Apple (AAPL), Microsoft (MSFT) and others instead".  So now what can she do?

Fire people, hike the dividend and make money fast.

  • IBM has over 431,000 employees.  They can afford to trim some fat.
  • IBM did declare a $1.10/share quarterly dividend, in line with previous on Oct 28th. Thanks to the current share price it works out to a forward yield of 2.71%
  • In addition to a strong dividend IBM announced it's adding $5B to its buyback plan, raising its total authorization to $6.4B.  
  • SHOW ME THE MONEY - Now that's a problem.  They reduced their forward earnings guidance. It's a game of "wait and see" at this point.

 

Bottom line: IBM has to prove it now.  If they can rake in some cash and get lighter as a company, Wall Street will reward shareholders. If they can it accomplish that, IBM could be the "Buy" of a lifetime. 

Disclaimer: Author of this publication has a long position in IBM.

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