IBM Common Stock (IBM)

In Q1 there was a lot of positive momentum behind the stock. However, the bloom has now come off that rose a little. Technically it has broken down. You have to climb through a couple of major resistance levels if you want to reclaim and then ultimately set higher highs. Kind of a single digit grower and ultimately, they have a pretty tough row. He would prefer something else.

This is in the penalty box. The problem is with having their AI and Watson on one side, and all the old hardware and systems on the other side. You have legacy assets that are not growing, and you have growth coming out of the other. Revenues for the last quarter were down 3% at constant currency. Growth profit margins are down year-over-year. Cloud is going to be a commoditized market, because you have Amazon (AMZN-Q), Salesforce (CRM-N) and Microsoft (MSFT-Q) in that area. It is really going to come down to Watson and how quickly they can write that Artificial Intelligence algorithm scalable to get market share and keep it. It could go sideways for a while and you’ll pick up yield, but hope that new services can grow faster than legacy assets is declining.

He would be a buyer here. Negativity is so great that a lot of it has impacted the price. He is still seeing strong cash flows and good earnings. You are only paying 11X earnings. They are migrating from old tech into new tech of Cloud. There is pretty good risk/reward.

*Short* This is a melting ice cube. They’ve had a lot of problems and a mixed view on the street, but when you consider what is happening, they’ve really been relying on share buybacks, manufacturing earnings, nonrecurring types of earnings. They’ve had 20 straight quarters of declining revenue. This is a company that has been shrinking, and it is shrinking fast. Dividend yield of 4%. (Analysts’ price target is $166.)

This concerns him, because the debt was just downgraded. They’ve had something like 17 quarters in a row where revenues have gone down. The dividend is not in jeopardy, but with revenues and earnings going down, you can imagine that someday it will be in jeopardy.

He wouldn’t hold this. For a number of years, they did well by using cost containment. Had a lot of fat on their bones, and became leaner, but you have to look at not just the bottom line, but also revenue growth. If there is no revenue growth, but you see profit growth, that perhaps means the company is doing a good job of managing their business, but revenue is the fuel of earnings. They got so lean that they couldn’t really cut anymore fat. Revenue growth hasn’t been there for a long while.

This is so big and diversified that even if they are not successful in one area of the tech business, they have other areas. He likes the shift they are making towards artificial intelligence, towards more cloud services, and reducing emphasis on the legacy dinosaur mainframes. They are moving with the trend, but you are not having to pay up for it. One of the cheapest companies in the Tech universe, at about 12X earnings with a dividend of 3%+.

Not amazing or terrible, it’s down the middle. It is probably going to be reliable. Doesn’t think it is super exciting, but doesn’t think you are going to get burned.

This has done pretty well in the last year, but that is after a five-year period of choppy performance. It has rallied out of the Trump election, and is probably not sustainable over a longer-term basis. They are a little behind the curve in terms of where technology is moving these days. It is more of a trading range stock now, and is at the higher end of its range. If it got closer to its 52 week lows, it would be a Buy again.

MSFT-Q vs. IBM-N. If she had to choose, her preference would be MSFT-Q because of their cloud business which will grow. IBM has not been able to figure out how to grow their top line. Both have cash overseas and will benefit if there is repatriation of cash policy changes.

There is lots working in large cap technology. The difficulty he has is that they are having a hard time growing. The stock is acting well and is certainly participating. He prefers Microsoft (MSFT-Q).

Traditionally, this was more of a hardware company, but has evolved quite effectively in the last few years. They have a nice earnings momentum ramp. Valuation, although they have to grow into it a bit, looks reasonable. It’s in a space of software services where there is less capital intensity. He likes where their strategy is taking them.

(Top Pick Jun 13/16, Up 17.89%) They are moving from hardware into services. She is not expecting earnings growth until late next year. They are consistently growing in areas where she wants to see them grow. She knows there will be declines in hardware, but there is an increasing amount of revenue coming from services.

ORCL-Q Vs. IBM-N. IBM-N works hard on their balance sheet. ORCL-Q is old tech. He bought ORCL-Q at $12 a share. He likes it and it probably has the most upside. His model price is $46.11, or 0% upside, but IBM is $165.03, trading right on its model price also. He likes the diversification of both.

Not a big fan. Free cash flow growth is falling. It is all the share buybacks that is spoofing the EPS a little bit higher. They don’t have market share and they don’t have pricing power, and are trying to catch up to all the big players.