Analysis of IBM 2016

Company: IBM

ISIN US4592001014 | WKN 851399

Business: An American IT service company. They are currently standing on five larger pillars and one tiny one: Global Technology Services (IT infrastructure and business process services), Global Business Services (Consulting and Application Management Services), Software (middle-ware and operating systems software), Service & Technology (business solutions requiring advanced computing power and storage capabilities), Global Financing (invests in financing assets, leverage with debt and manages the associated risks) and the final one is Other (it generates 206 million USD so pretty insignificant). 

Active: World wide making sales in over 170 countries.

P/E: 9.2

Here you can find the previous analysis of IBM 2015.

The P/E of IBM is excellent with 9.2 but the P/B is far too high for my liking with 8.5 and it therefore also gives a clear no go from Graham. The earnings to sales are looking ok with 16% and the ROE is still amazingly high with over 90%! The book to debt ratio looks less appealing with only 0.15 which is very bank like.

In the last five years they have had a very poor revenue growth rate of -5.2% which then gives us a motivated P/E of 8 to 10 which means that IBM is today fairly valued by the market.

They want to stay on top and for this reason they spend almost 40% of their earnings on R&D which I find to be a very reasonable value.

They pay an excellent dividend, especially for being an American company, in the size of 4.0% which only correspond to 37% of their earnings so they should be able to keep it up!

Comment: It is interesting to observe the analysis from one year ago. The P/E and also the P/B is now much better. The earnings to sales have significantly improved. ROE is lower but their book to debt ratio have also improved which means they are less leveraged. Revenue is however significantly down.

Conclusion: Graham says not to IBM and I say yes to it. The P/E, ROE and dividend are simply looking too good to be ignored and yes, one can be disappointed by the decreasing revenue but IBM manages to hold their earnings at a high enough level to at least prevent me from being worried. I will remain as a shareholder in IBM.

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