International Business Machines Corporation (NYSE: IBM) might have been raised to “Buy” by Goldman Sachs in the middle of August, but the ongoing slowness in the economy may be taking a further toll on the company if more recent data turns out to be accurate. A report this week looks innocent enough after Credit Suisse reiterated a “Neutral” rating and many dismissed it as a non-event even though estimates were lowered. There is more to this, and it can actually have a big drag on the Dow Jones Industrial Average.
Credit Suisse lowered the estimates from $13.29 EPS for 2011 and $14.77 EPS for 2012 down to $13.23 EPS for 2011 and to $14.65 EPS for 2012. While the macro-headwinds were noted, the public and financial verticals account for 45% of sales and this is where the slowdown seems to be most affected currently. The age of austerity and the continued caution in the finance sector are taking a toll.
The research report also lowered the services and also the storage/servers segment for sales in 2011 and 2012. This has ramifications for Hewlett-Packard Co. (NYSE: HPQ) while it restructures and looks to jettison its PC unit and it also has ramifications for Dell Inc. (NASDAQ: DELL) as it aims to further grow its IT and higher margin servers and storage operations.
Our larger concern is that Credit Suisse has a sub-peer fair value for IBM. The firm gave a fair value analysis of $175 on the stock, but noted that it would become more constructive under $150… Under $150? That would be very bad for the DJIA as the price-weighted index is heavily weighted by IBM. Big Blue is only 1 of 30 components, but it has more than an 11% weighting due to that high share price. If IBM were to drop 10% and all other DJIA components were to stay flat, that still acts as more than a 10% drag on the DJIA. It is also a near impossibility that IBM could fall 10% without taking down every other company that sells to the government and financial sectors. The reality is that if IBM were to legitimately drop down that much, it might have more than a 3% drag to the index even if the other components do not really have much news.
IBM is a global barometer of tech, IT, and even finance and government spending. It is far from the only barometer but it is certainly one of them. The $175 target of Credit Suisse compares to a Thomson Reuters consensus price target objective of about $193.00.
The good news is that IBM keeps buying back stock. The 1.7% dividend yield is likely not enough to drive investors. The age of austerity and attacking those banks and financial giants comes with a price.
Our take is that IBM’s growth is looking less but is not dying even if Credit Suisse is more cautious. Where this will become more interesting is when analysts and investors begin analyzing and projecting that huge services backlog. In July the company reported that the June 30 services backlog was up $15 billion to $144 billion. That is a monster sum and it will be interesting to see if the figure is hanging in there.
The good news is that this is still not anything signaling a looming recession for Big Blue and its competitors. The other big issue is that IBM is targeting $20.00 EPS by the year 2015. That is up about 50% from this year and that certainly leaves far more upside to this $3.00 annualized dividend.
JON C. OGG
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