Thursday, April 18, 2013

Analysis of IBM

An American Software and Service company

Company: IBM

Business: Today they have three segments. The biggest one is Software (44%) the second biggest one is Service (41%) and the final one is hardware (16%). Before IBM were producing the ThinkPad etc. but now all of that is sold to Lenovo. The hardware they are making today has to do with servers and bigger networks that they are setting up and running.
 
Active: Globally. According to their reports they are today present in 170 countries.

Comment: Berkshire Hathaway had as a rule never to invest in technology companies. Today IBM is so much directed towards services that Warren now own stocks in it.

P/E: 14.9



 
The running P/E is fully acceptable with its 15. The P/B is however very high and for my opinion it is too high. This leads to that according to Graham it is very clearly not a buy today. They have a E/S of 16% which sounds reasonable for what they do. The book to debt is a very low value which I also find bad. For an American company they have a very low buffer but I assume this comes from their conversion towards services. The pure technology companies keep a large buffer to secure themselves if they fall behind competitors so that they can push R&D and get back on top of things. IBM no longer join in that run and therefore their buffer can be much smaller. I put in an expected growth of 3% which I would have hoped should be much bigger. The growth they have had for the last five years turn out to be seriously bad with only 0.2% per year. This comes from that 2008 was an excellent year with huge earnings. They have only just now managed to get back to those earnings again but also... the earnings in their fourth quarter was extreme and out of the ordinary so we will have to see how they progress during 2013. Both Lynch and Graham gives a P/E of below 10 which means that their current 15 is actually a slight overvaluation based on their growth. They spend a good amount of money on R&D and I must admit that IBM has done and most likely will arrive with excellent innovations in a broad range of fields. It seems as if they have a very healthy innovative culture that will make sure that they also in the future will receive sound earnings.
Due to that the stock is currently over-priced (is it a Buffet effect?) the yield is low with its 1.5%. Most American companies are giving 2% or even slightly above. These 1.5% represents 22% of their earnings which is low and indicates that they will continue to give a steady increase in the dividends being paid out.
16.7 billion $ in earnings is not a bad value with the last quarter jumping to 5.8 billion on its own. Their debts are very high for an American company today.

Conclusion: Today I would not buy this stock. It is a healthy company but it is also valued accordingly. I´m fairly certain that Warren will keep it for the very long run and if you want to join him then you should buy it. I would personally wait until the stock has minimum 20% correction before I would be prepared to jump in on it meaning a share price of max 180 $ and even then I would think twice before pushing the trigger and look over the number again.


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