Analysis of IBM 2014

Company: IBM

Business: An American IT service giant. That today are divided into four segments of which the hardware is getting smaller and smaller by selling it off to for instance Chinese Lenovo. The segments are: Software (Websphere, Information management & Tivoli), Services (IT, business consultancy etc.), Financing (giving credit to companies to afford to buy the Software & Service products) and finally Hardware (servers and Power Systems).

Active: They are a global play like all the American giants and are currently present in over 170 countries.

P/E: 11.8



This company was analysed due to a request that can be found here.

For the previous contrarian analysis of IBM please look closer here.

The P/E for IBM is looking fully acceptable with 11.8 but the P/B is extreme with 8.5 (maybe the saying here goes... if you owe 1 million to the bank you have a problem and if you owe 103 billion well... then the bank has a problem. Still due to the bad P/B the company is of no interest to Graham. They have a very nice earnings to sales of 16% and the ROE is amazing! Truly amazing with 72%! The book to debt is not so nice with the ratio of 0.2. In the last six years they have had a negative yearly growth of -0.6% which is bad and this then gives us a motivated P/E of 7 to 10 which means that today IBM is fairly valued by on the market. They try to stay ahead so they are spending 38% of their earnings on research which I find fully reasonable. They also pay an, for American standards today, an ok dividend of 2.1% which corresponds to only 25% of their earnings so I see no reason for why they should decrease that. They have a very strong share buy back program running.

Conclusion: Graham says no to this company and I am uncertain. There are several values that I do not like but others are truly great such as the P/E, E/S and ROE. I will actually stretch myself to say that I think one can today get a great company at a fair price if one decides to step into IBM as shareholder. I do not think they an massively increase their revenue... there simply is an upper border for such things but IBM as a company seems to be out of favour on the stock market at the moment and I am sure they will arrive with new products and new solutions to generate also future revenues. If we look at the German SAP which is a pure IT software and service company (analysis here) that are growing around 6% per year then they are being traded at a P/E above 25. That said it does not mean that IBM and SAP should be traded at the same P/E but maybe both of them should over time get closer to each other.

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