Annex Bulletin 2007-14 April 16, 2007
A partially OPEN client edition
Accenture Beats Forecasts, Again (Analysis of Accenture's 2QFY07 results)
Updated 4/16/07, 4:30PM PDT
A Preview of IBM First Quarter Business Results
IBM Stock Still Grossly Undervalued
Priced at Peer P/E Ratios, IBM Should Be Worth $124?
SCOTTSDALE, Apr 16 - IBM stock is inching up toward its closing price of 2006 ($97), but it is still down for the year and is grossly undervalued relative to its peers.
Our latest analysis, done on the eve of Big Blue's first quarter results, basically confirmed what we said nearly five months ago. IBM stock should be worth $124 if priced at peer P/E ratios. We said as much in late November when we also took the market temperatures of IBM and its five peer competitors (see "A $125 Stock," Nov 2006, and "Grossly Undervalued," July 2006).
And how did we arrive at such conclusion? By analyzing the business fundamentals and market data of IBM, HP, Fujitsu, EDS and Capgemini - three conglomerates and two global services competitors.
As you can see from the above chart, the IBM net profit is about three times higher than the average of these five competitors, yet its price/earnings (P/E) ratio is 31% lower. Putting it another way, if the IBM peers' average P/E ratio were applied to Big Blue's business fundamentals, its stock price should be $124 per share. Instead, IBM closed today at $96.18, up 1.3% on the day (Apr 16).
The same pattern is discernible from a comparison of IBM vs. five major competitors' profit margins. IBM net and operating profit margins are about three times those of its peers (see above chart).
Based on everything we have seen and heard in the marketplace during the first quarter, this pattern will continue after tomorrow's results are release, if not widen in IBM's favor. IBM is likely to hit or exceed analyst expectations (revenues of $21.86 billion, EPS of $1.21, according to Thomson Financial).
It remains to be see if the company gets the credit for it on Wall Street this time around that has eluded it in the past. During the last year or so, investors seem to be more preoccupied chasing the values elsewhere in the IT industry, such as Apple or HP, for example.
Meanwhile, while looking up wistfully up at the HP and Apple stock gains in the last 12 months, IBM shareholders can console themselves by looking down at Microsoft. For once! Wall Street has treated the erstwhile IT industry highflier in the last year with even more disdain than the Big Blue stock. That was the first time something like that has happened since Microsoft's rise to prominence in the IT industry (see the thumbnail chart).
Meanwhile, IBM's one-string instrument for propping up the stock price isn't working anymore. Even though the company has spent $76 billion since 1995 trying to entice Wall Street into favorable valuations, most of it in the last 7 years (see the thumbnail chart), Big Blue's market cap keeps sliding even faster than the drop in shareholders equity.
Maybe if the company stopped minding Wall Street opinions, and started minding its business (by investing all these billions into acquisitions instead of lining investment bankers' pockets), favorable valuations would also soon follow?
Happy bargain hunting!
The Value of pi (π) - Analysis of IBM System p and System i market and product strategies
The (T)ides of March Sink Markets Again - Analysis of global economic & investment trends
Capgemini Caps Great Year, Saves Best for Last (Analysis of Capgemini's fourth quarter business results)
EDS: On Sunny Side of Street (Analysis of EDS' fourth quarter business results)
CSC: Where Less Seems More (Analysis of CSC's third quarter fiscal 2007 business results)
Fujitsu: Sales Up, Profit Down (Analysis of Fujitsu's third quarter fiscal 2007 business results)
IBM Shatters Records (Analysis of IBM's fourth quarter business results)
IBM Stock Passes Century Mark (Analysis of Big Blue's Stock Performance)
Happy Days Are Here Again (Analysis of Top 20 IT leaders' latest stock market and business performances)
Globalization Accelerates (Analysis of United Nation's annual survey of global investments)
IBM: A $125-Stock? (An update to "From Small Acorns Mighty Oaks Grow")
Capgemini: Longest Sustained Stock Price Rise (An update to "By Leaps and Bounds")
HP: New King of the Hill (Analysis of HP's fourth quarter business results)
IBM: From Little Acorns Mighty Oaks Grow (Analysis of IBM's "State of the Union")
Capgemini: By Leaps and Bounds (Analysis of Capgemini's preliminary third quarter business results)
Fujitsu: Good Performance Gets Better, More Global (Analysis of Fujitsu's first half FY2007 business results)
IBM: A Slam Dunk Quarter (Analysis of IBM third quarter business results)
IBM: Services in a Box (Analysis of IBM Global Services' Ground-shifting Announcements)
Strong Comeback by IT Stocks in Third Quarter (Analysis of top 20 IT companies' market and business trends)
Stock Buybacks: A Fading Fad (Dell, erstwhile "King of Fluff," suspends its stock buybacks)
Capgemini: Growth Continues (Revenues, net profit up in double digits, margins also improve)
Power of Manpower (While others move to India, Russia... AMD invests in New York, hailing "phenomenal" quality of its labor force)
Ebb Tide Lowers Most Boats (Analysis of EDS' and CSC's latest quarterly results)
IBM vs. HP: A Tale of Two Blues (Both companies are doing well in business, but only HP is favored by Wall Street; Big Blue trying to change that now with its new "India Opus") [Annex clients click here]