IBM Common Stock (IBM)

It has not been a pretty picture for IBM. 8% revenue decline over the last quarter.

Doesn’t like this one. Has been around for years and, early on, was a very innovative company. There is a perception that over the last 5 years, they have not really innovated. Instead, they have taken their cash flow and just bought back their own stock. As a result, they haven’t invested in R&D and new products the way they should have. In the last several quarters, the company has largely disappointed on earnings and growth outlook. A very big ship and is not going to be easy to turn around.

Has been one of the worst performers in the market in 2014, but feels it might be coming into its own in 2015. A lot of people are talking about how “old tech” is making a resurgence. This is one that he is quite positive on.

Gained a tremendous amount of benefit from a long 4-5 years of cost-cutting, and it was well orchestrated. They clearly articulated how they were going to cut costs to the benefit of the bottom line, and they did that. He has been very cautious on this for a number of years because you can only cut costs so much, before you start to cut to the bone and affect your ability to produce revenue. Revenue has really only grown low single digits for a very long time. The market was paying a multiple much higher than that for growth that had much more sustainability.

Stock has fallen off a bit in the last couple of quarters. Kind of flat lined and hasn’t really moved anywhere. Looks like it has reached a bottom in terms of the technicals. Over the last several years, you are seeing flat, even declining growth, and that is not something you want to see in a technology name. There are some concerns about their ability to compete in a fast-changing IT market. Trading at 10X forward PE and probably a 9% long-term growth rate. Dividend seems pretty secure.

Thinks this company is in real difficulty. He wouldn't own over the next couple of years. They have only supported their share price through financial engineering. For the amount of stock they bought back to keep their earnings growth up, they have done it all with debt, and they are running out of room to do that. (See Top Picks.)

80% of their business was hardware 20 years ago, and now it is 80% software. Generally constructive on this at these levels. But not out of the woods based on their missed guidance going forward. It's a question of what announcements come out and what they are working on in R&D developments. He has a “wait-and-see” approach.

There are other tech companies with good top line growth. IBM grows by buying back stock. There are a lot of better ideas in the tech world.

About 11% revenue growth, total, in 10 years. They reduced shares by 35%. So the benefit was share buy backs. There is not enough upside in his opinion.

Did very well during the recession. You are starting now to see a difference between old-tech and new-tech. IBM will benefit from a recovering global economy. If you get this at the correct price you can hold it multi-year and get growth and dividend.

Closed at $187.88 yesterday and his model price is $189.37, a .05% upside. This is a story of reducing capital out of their business, so when they report every quarter, the reports are lukewarm to the analysts. Underneath, they are buying huge quantities of their stock. That keeps their model and stock prices up. Doesn’t see tremendous upside, but also doesn’t see any big downside. Yield of 2.34%.

This is a company that has really been challenged on the revenue side for quite a while. Their hardware business is late cycle and their services business has been a little bit lumpy. They have made the most of their cost cutting initiatives, which has really driven the stock for a number of years.

Projecting to have $20 per-share earnings growth by 2015. A lot of that is coming from share buybacks. The transition from hardware to software over the past couple of decades, has been wonderful. This is more of a trader, which you can trade around a bit. If you hold it, you might be able to get a better price for it as it trades up, but if you don’t you can wait until it comes off a little bit.

Screens well. High ROE. Rising earnings and big free cash flow. However there is a lot of debt on the balance sheet. You’re not paying a lot for this company. Buying back all the stock that they can. Prefers Oracle (ORCL-N).

They are consistently criticized by the investment community, for not giving them enough guidance. This company is focused on the long-term. An incredibly powerful company. Good strong balance sheet. Exceptionally broad product category. Getting involved in new software technology.