Summary
- IBM is cheap on a fundamental basis with an FCF yield close to 10% and a dividend yield above 5%.
- However, your investment returns depend on whether the current value destruction trend reverts.
- There is a new CEO, a new company, a new market focus with hybrid cloud, but there is also a $55 billion mountain of debt.
- If you prefer watching, there is a video version of this analysis too, and I have also added a discussion about why IBM's numbers are jinxed according to Chanos.
Forgotten and hated - Is IBM stock a buy now after 10 years of being down? Key points and issues summary
The main issues the market sees for IBM Corp. (IBM) are the following (I’ve read approximately 30 analysts reports and listened to the latest conference calls):
- Lagging industry peers in growth
- Leverage growth on declining revenue and income
- Continuous stagnation and weak performance
- Red Hat questionable merger rationale
- Beating analysts’ estimates in only 2 of the last 8 quarters
- Revenue estimates down from $80 billion to $76 billion for 2021
- 2022 EPS estimates cut from $15 to $13 due to COVID-19
- Reducing employee count - thus not trying to grow and leading to high skill loss (example: Lisa Su - left in 2007, currently CEO of AMD, which has a market cap close to IBM’s now)
- Former CEO Rometty’s compensation went from $16 million in 2012 to $158 million in 2019, while the market capitalization went down significantly. To me personally, a picture like the following tells me the CEO is focused on herself and on the ivory tower she lived in, but that is just a subjective perspective and hopefully things change now with the new CEO.
(IBM CEO Rometty - 2012-2020 - Source: IBM Annual report)
- Buffett bought $10.7 billion in 2011, took a look and sold.
- IBM spent $200 billion on buybacks over since 1994 - almost twice the current market capitalization.
- The company will split in 2021; thus, it will spend two years focusing on how to split instead of focusing on how to grow.
- No buybacks till debt ratios improve - around 2022 at first.
- M&A strategy is unclear, and it's also unclear where the discussed growth will come from.
- Quantum computing is too early to create profits in this decade.
- Cloud will be a commodity in the future, with thin margins given the already strong competitive environment (think: Amazon (AMZN), Microsoft (MSFT) and Google (GOOG, GOOGL)).
All, and I mean all, analysts are focused mostly on future growth - a 5% yield is irrelevant in today’s investment world. But if the above would be any different, you would not have an opportunity to buy IBM stock at free cash flow yield of 10% and dividend yield above 5%.
