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3 Reasons International Business Machines Corp. Stock Price Will Rise

IBM stock price - 3 Reasons International Business Machines Corp. Stock Price Will Rise

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As 2017 has rolled on, I’ve slowly come around to the bull case for International Business Machines Corp. (NYSE:IBM). The IBM stock price has slowly, but steadily come down, dropping over 8% so far this year, but the IBM news hasn’t been particularly bad.

3 Reasons International Business Machines Corp. (IBM) Stock Price Will Rise
Source: IBM

In fact, on occasion, the news has been downright good. A third-quarter earnings beat sent IBM stock higher, as investors saw enough to project that a 22-quarter streak of declining revenue might be coming to an end. As the stock was giving back those gains two weeks ago, I argued IBM looked intriguing, if only because the downside to the stock seemed reasonably limited.

On further review, however, I think there’s enough to consider IBM an outright buy — even with the IBM stock price having moved up a few points since then.

IBM has its challenges, and IBM stock has its risks, but there’s enough here to believe that the recent bounce in the stock price should last quite a bit longer.

The IBM Stock Price Is Cheap

Simply being “cheap” isn’t enough to turn bullish on a stock, as I argued this summer in highlighting 10 ‘value traps’ to avoid. But it does help that the IBM stock price remains rather cheap from a valuation standpoint.

Based on 2017 earnings-per-share guidance of “at least” $13.80, IBM stock trades right at 11 times earnings — and at a similar multiple to free cash flow. It’s a multiple that suggests a modest decline in the performance of the business going forward.

Looking backward, that multiple makes some sense. In 2016, adjusted net income declined 11% year-over-year. In 2015, the figure dropped 12%. 2017 guidance suggests a modest increase in EPS of about 2%, but net income likely will again drop modestly, as EPS is benefiting from share repurchases.

The ~11 multiple shows that investor expectations are low. And recent history shows why those expectations are low. This has been a declining business for some time on both the top and bottom lines. But what’s helpful for IBM stock going forward is that a downward performance trend looks roughly priced in. In other words, this isn’t a stock pricing in a turnaround. And that means that if a turnaround happens, the IBM stock price will have plenty of upside, thanks to the combination of earnings growth and multiple expansion.

IBM News Is Getting Better

By no means is an IBM turnaround guaranteed. Still, there are signs that the company at the least can return to revenue growth — a necessary first step in that process.

On this site earlier this month, John Kilhefner cited IBM stock as one of eight set to benefit from bitcoin and blockchain adoption. “Strategic imperative” revenue is moving toward half of total sales — and growing by double digits.

IBM has some areas of weakness, to be sure, but it has growth opportunities in cloud, IoT (Internet of Things), and artificial intelligence as well. For 2018, analysts at the moment are expecting just a 0.1% decline in revenue YOY. IBM is knocking on the door of finally providing some growth once again.

And, in the near-term, there’s a potentially underappreciated driver for both sales and margins. IBM’s mainframe business has been left for dead, but on the company’s Q3 conference call, management spoke optimistically of a new upgrade cycle in that category. The storage business overall has been tough for years, thanks to plunging pricing driven by flash options, and that weakness has hit IBM particularly hard.

But there’s room for a rebound there, at least in the near-term. Strength in that category is just one reason why IBM may be ready for a solid 2018.

A Good 2018 for IBM Stock?

Last week, InvestorPlace market strategist Anthony Mirhaydari highlighted IBM stock as one of 5 blue-chips to buy for December from a technical standpoint. And there’s an interesting near-term case for upside in IBM.

For one, though the stock filled the gap downward after its post-earnings pop, it’s rebounded quickly after dipping below $150. There’s still a case here that a “good enough” performance will help support to hold at a 4% yield. That support level would be $150, just below the current price, and it should move higher when the next dividend increase is announced in April.

A dividend alone can’t support a stock, as owners of companies like General Electric Company (NYSE:GE) and AT&T Inc. (NYSE:T) have learned of late, but it can help if performance simply stays good enough.

There’s also a case that IBM stock is due for some buying. It’s true that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) cut its stake in IBM earlier this month, but Berkshire traditionally hasn’t been the best tech investor and, in the near-term at least, it appears to have sold at or near the bottom.

Meanwhile, IBM is one of the last cheap big-tech plays out there. Intel Corporation (NASDAQ:INTC) finally has taken off. Microsoft Corporation (NASDAQ:MSFT) has shed its low-growth ways and, as a result, its low earnings multiple. And for investors who believe in the long-successful “Dogs of the Dow” strategy, IBM most likely will be on the list for 2018.

IBM Is a Buy

Again, I’m not necessarily convinced IBM is the next INTC or MSFT — or that its attempted turnaround will be a smashing success. But at current prices, it doesn’t have to be.

With some potential good news in the near term, I do think, at the least, 2018 will be a better year for the IBM stock price than was 2017.

And that’s enough to consider buying IBM stock now.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2017/11/3-reasons-ibm-stock-price-rise/.

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