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?
Valuation
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.
Analysts
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.
| P/E | Fw P/E | P/B | PEG | Avg Rec | Avg PT (%Implied Upside) | Div Yield | |
| IBM | 13.19 | 10.29 | 11.26 | 1.26 | 2.40 | $225.57 (+18.4%) | 1.79% |
| ACN | 16.18 | 16 | 9.35 | 1.42 | 2.10 | $79.63 (7.6%) | 2.17% |
| HPQ | – | 5.46 | 1.67 | – | 3.20 | $19.07 (-2.51%) | 2.71% |
| Edge | IBM | HPQ | HPQ | IBM | ACN | IBM | HPQ |
Price movements
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.
Dividend
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
IBM reported EPS of $2.70, up from $2.61 reported in the prior quarter. However, analysts were expecting EPS of $3.05, so, the earnings disappointed many. IBM’s Senior Vice President attributed the weak earnings to two main causes: The inability to close some profitable deals prior to the end of the fiscal quarter, and a weaker Japanese yen.
With regards to the inability to close deals before the deadline, the argument is valid (as the deals are worth around $400 million), but certainly does not explain why the company’s revenue was so weak: The gap between the estimated revenue and the reported revenue is almost $1.5 billion. This is not something that can be attributed to missing a deadline for deals worth only $400 million.
The losses attributed to the Yen’s drastic depreciation this year are legitimate, and relatively hard to hedge as most of Japan’s revenue comes from service operations, and are therefore conducted in Yen. The company was far from weak in Japan, however, as it actually experienced higher revenue growth in Japan than in the Asia/Pacific region as a whole.
Other causes probably played a role in the weak earnings: Lowered government demand due to budget cuts in both the U.S. and Europe, product transitions and shifts in technology, and general macroeconomic concerns weighed down demand for products.
That being said, the company also reported healthy margin gains and a drop in total expenses, as well as a slight growth in cash. This has been a pattern for the company for the last few quarters, and is an encouraging sign that points to a rise in productivity and a more favorable revenue mix.
The company also reported a rise in its order backlog, which, coupled with the $400 million in deals, a possible slowdown of the Yen’s drop, and better worldwide economic conditions, could bring better earnings next quarter. The company has actually kept its 2013 outlook unchanged. Current analyst earning consensus for this year is at $16.74/share.
Bottom line
It is understandable that the weak earnings disappointed many investors. However, IBM remains one of the strongest tech companies out there. The recent stock price plunge has driven valuation ratios down, so these price levels could be good entry points for value investors who believe that the company’s weaker-than-expected results were part of an off-quarter, rather than a sign that International Business Machines Corp. (NYSE:IBM) has reached a point of declining growth and earnings.
The article After Post-Earnings Plunge, Is This Stock an Opportunity? originally appeared on Fool.com.
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