For the first time in years, International Business Machines Corp. (NYSE:IBM) missed analyst estimates, and reported weaker-than-expected earnings and revenue. As a result, the company’s stock plunged over 8% last week. Has the market overreacted? Are current price levels an opportunity for value investors?
After the recent earnings report and price drop, it is interesting to see how the valuation ratios for IBM are now. With regards to P/E, the stock is currently trading at 13.19 times earnings, which is slightly lower than the industry’s average, and better than competitors like Accenture Plc (NYSE:ACN), which has a P/E of 16.18, or Hewlett-Packard Company (NYSE:HPQ), which does not even have a positive P/E as its EPS is negative.
When taking into account future earning estimates, International Business Machines Corp. (NYSE:IBM) is also in decent shape. With a forward P/E of 10.29, the stock seems undervalued compared to most of its peers (like Accenture Plc (NYSE:ACN), which trades at a forward P/E of 16). However, Hewlett-Packard Company (NYSE:HPQ) seems to be the most undervalued of the lot if future earning estimates are to be trusted, as its forward P/E is only 5.46.
IBM’s P/B is worryingly high at 11.26, higher than the industry’s average and higher than Accenture Plc (NYSE:ACN)’s 9.35, and Hewlett-Packard Company (NYSE:HPQ)’s 1.67. When factoring in growth, however, IBM comes out in a strong position: Its PEG is 1.26, better than most of its competitors. It cannot be said that International Business Machines Corp. (NYSE:IBM) is a drastically undervalued stock, but it does have better valuations than most of its competitors in areas like P/E or PEG. Its high price-to-book ratio, however, is a bit worrying.
Analysts are neutral to slightly bullish on the stock. It has an average recommendation of 2.40 (overweight-hold), better than Hewlett-Packard Company (NYSE:HPQ)’s 3.20 (hold-underweight), but slightly worse than Accenture Plc (NYSE:ACN)’s 2.10 (overweight). However, with regards to price targets, IBM’s average price target of $225.57 implies that the stock has an almost 20% upside potential from current stock prices.
Accenture’s implied upside is less than 8% and Hewlett-Packard Company (NYSE:HPQ)’s current stock price is actually higher than its average price target. However, one should note that very few International Business Machines Corp. (NYSE:IBM) price targets have been published after its last earning report and subsequent stock price plunge, so it its likely that, as analysts adjust their price targets to the post-earnings scenario, the almost 20% implied upside for the stock will erode.
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Had it not been for Friday’s drastic +8% drop in the stock price, IBM would have been up almost 10% this year. After the drop, it is now actually almost 1% down this year. Since its late-2008 lows of $80, the stock has risen 135.75%, in almost a perfect straight line, with no major ups and downs. Friday’s drop is clearly the exception.
The stock is now 12% off its 52-week high of $215.90, and only 5.83% above its 52-week low of $179.54. Even though the likelihood that the stock will recover some lost ground this week is high, it might be harder for International Business Machines Corp. (NYSE:IBM) to hit new 52-week highs anytime soon.
The company has been a consistent dividend payer since 1987, never once scrapping it in 26 years. It currently pays a quarterly dividend of $0.85/share, which works out to an annualized yield of 1.79%. However, even with Friday’s price drop, the yield is lower than Accenture Plc (NYSE:ACN)’s 2.17% or Hewlett-Packard’s 2.71%.
Earnings: Looking ahead