International Business Machines Corporation (IBM)

Equity
US
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Strong & resilient to price shocks

Key return factors

Excellent dividends

Somewhat favourable analyst view

Good margins and returns

Company profileInternational Business Machines Corporation provides integrated solutions and services worldwide. The company operates through four business segments: Software, Consulting, Infrastructure, and Financing. The Software segment offers hybrid cloud platform and software solutions, such as Red Hat, an enterprise open-source solutions; software for business automation, AIOps and management, integration, and application servers; data and artificial intelligence solutions; and security software and services for threat, data, and identity. This segment also provides transaction processing software that supports clients' mission-critical and on-premise workloads in banking, airlines, and retail industries. The Consulting segment offers business transformation services, including strategy, business process design and operations, data and analytics, and system integration services; technology consulting services; and application and cloud platform services. The Infrastructure segment provides on-premises and cloud-based server and storage solutions for its clients' mission-critical and regulated workloads; and support services and solutions for hybrid cloud infrastructure, as well as remanufacturing and remarketing services for used equipment. The Financing segment offers lease, installment payment, loan financing, and short-term working capital financing services. The company was formerly known as Computing-Tabulating-Recording Co. International Business Machines Corporation was incorporated in 1911 and is headquartered in Armonk, New York.

Valuation: Slightly overvalued

Multiple

TTM

NTM

P/E

19.10

19.30

PEG

0.10

P/B

6.70

5.00

P/S

2.50

P/FCF

12.30

14.30

EV/EBITDA

16.10

16.70

From both historical and forecast perspectives, the stock is slightly overpriced compared to similar stocks. Specifically, the stock is fairly valued on P/E, neutral on EV/EBITDA, and underpriced on P/FCF.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 6ppts over past six months and grown 8ppts slower in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 174 and suggests 2% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 200.8. This translates into 18% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 121.4. This is equivalent to 29% downside potential in the worst case.

Profitability: Good

RoE

International Business Machines Corporation reported a return on equity (RoE) of 35.7% in the last 12 months, up from 33.7% in FY23. The market consensus projects an RoE of 30.9% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 6.0% in the last 12 months, an increase from 5.7% in FY23. The market analysts predict that RoA will be 5.5% in FY24, again weaker than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 7.9%, below the peers. The consensus estimate for FY24 for RoCE is 8.0%, again behind the peers.

Net margin

EBITDA margin

Historically, IBM has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 13.2%, a growth from 12.1% in FY23. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 20.5% in the last 12 months, up from 20.5% in FY23.

RoIC / WACC = 1.2(average value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.2 in the past several years. This ratio implies a average shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

IBM reported revenue of USD 62 071mn in the last 12 months, up 0% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS grew 9% from FY23 to USD 8.95. Market expects EPS to reach USD 8.66508 in FY24.Revenue has been declining slowly over the past several years (negative), while EBITDA growth has been steady. This all contributed to very fast EPS growth (strongly positive). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of EBITDA, EPS and FCF.

Dividends: Excellent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been strong and significantly above its peers. At the same time, the average five-year yield has been significantly higher and exceeded most of its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note solid return on capital, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, poor working capital management, and an unfavourable capital structure.

Volatility: Negligible

In normal market circumstances, IBM is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to minimal.

Stress-test: Negligible

In highly turbulent market conditions, IBM is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Very low

IBM boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.