IBM Common Stock (IBM)

Came off their highs. Use cost cutting successfully. Bolstered earnings over a multi-year period. It is a low growth company, but very stable and predictable. A high percentage (70%) is software and services and is recurring. It is relatively fully priced and they have run most of the costs fully out of the business.

What are the key factors that you look at in assessing the prospects for future growth? What are your favourite metrics in relating those growth factors to the valuation of the stock? There is a lot of cash flow generation. They have a component that is recurring revenue. She sold out of her holdings because she didn’t see growth on the top line. There was earnings growth, but that was essentially because they were taking on debt to buy back shares. There is only so long that you can play that game. A lot of tech stocks have to reinvent themselves and this is in that category. If you see an uptick in revenue, that is probably the best catalyst for the stock.

This company is in the right neighbourhood because tech, as a group, is showing some strength. However, this company is probably not the best choice in the group right now. Likes the sector and he would look at SPDR Semiconductor ETF (XSD-N) or the PowerShare QQQ ETF (QQQ-Q).

Some of its gains from its lows were to do with currency. US$ was fairly weak and they were exporting into stronger economies. Longer-term this is a good company. Selling off now because of relatively disappointing earnings. Thinks this is a long-term very good story. If you want exposure to cloud computing or high-end government contracts they have this.

Old resistance becomes new support. Late 2011 at $193 became new support. It is just now testing a new ceiling of about $200. You want to see it stay above this level to buy. It is testing the breakout point and this is very bullish.

Profit margins on companies in the S&P 500 are very, very high relative to history. If you look at where the earnings have been coming from in general for most companies it has not been coming from revenue growth, it has been coming from cost-cutting. Feels the reason this one has traded well over the last few years is that it has very good recurring revenues and has a big global footprint. Technically it has been consolidating over the last couple of months. He would prefer something that has revenue growth such as Google (GOOG-Q) that has both revenue and earnings growth..

Consistent generator of cash flow. It is trading cheap, at the low end of a positive growth channel. It is a buying opportunity.

Looking at the chart, he sees it at the 200 day moving average which could represent some support level. Some of the more recent earnings reports weren’t as robust as the market wanted so the stock sold off a bit. Have reaffirmed full-year guidance. As a long-term stock, this is trading at 12.5X earnings with a long-term growth of high single digit/low double-digit. A decent buy at 1.3 PEG ratio.

Really good quality mature tech choice. A few years ago, management said that with a combination of modest growth and aggressive cost-cutting, they were going to have a 12%-14% target on earnings. Have hit right on. Turned the business into a recurring revenue and a recurring earnings type of business. Valuation isn’t stretched.

Really well managed. Created a plan about 3 or 4 years ago for growing their earnings, which was going to be a combination of revenue and cost cutting. They fulfilled that and more. Have become a services company. 60%-70% of their profits come from recurring revenue. Feels there is more to go.

The stock has been tremendous and has done very, very well. At 13X forward PE with a 10% estimated growth rate there is some pretty decent value here.