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Big Blue is Still a Buy

10/29/2013 7:00 am EST


John Buckingham

Editor, The Prudent Speculator

Valuations are not as inexpensive as they were one or two years ago, so we are being more selective in awaiting new opportunities. We like to say that there will always be another bus to come along so we can be patient, suggests value expert John Buckingham, editor of The Prudent Speculator.

We remain enthusiastic about the long-term prospects of our broadly diversified portfolios, even as we are operating with a bit higher cash than usual.

One name that we would not hesitate to buy today is International Business Machines (IBM), as Big Blue was feeling blue following the beating shares of the technology giant suffered in the wake of its Q3 numbers.

Incredibly, IBM actually managed to beat EPS estimates by three cents when it posted third quarter earnings of $3.99 per share, but the problem for many investors was that the top-line came in at just $23.7 billion, compared to projections of $24.7 billion.

IBM CEO Ginni Rometty stated, “In the third-quarter we continued to expand operating margins and increased earnings per share, but fell short on revenue.”

Rometty explained, “Where we had identified high growth opportunities and pursued them aggressively—cloud, mobile, business analytics, and security—we continued to show strong growth. This underscores our strategy to continuously transform the company to high value. We are maintaining our view for the full year and remain confident in our ability to achieve at least $20 operating EPS in 2015.”

In our view, IBM has shown no reason that that 2015 earnings objective won't be achieved, which suggests to us that the shares represent great value today, trading south of $175, while yielding 2.2%.

Of course, we would prefer to see a return to robust revenue growth for IBM and other companies, but we remain impressed with how well Corporate America has navigated a lousy domestic and global economic climate.

It's true that cost-cutting, stock buybacks, efficiency improvements, and market-share gains and acquisitions have their limits, but corporate profits are at record highs, even with all of the headwinds. Just imagine what could happen if some of those winds cease to blow, or better still, if a tailwind develops.

After all, despite all of the concerns facing the US and international economies, Standard & Poor's, as of October 17, is still expecting S&P 500 (SPX) bottoms-up operating earnings per share to climb to $107.52 this year, from $96.82 in 2012.

S&P also looks for profits to jump again next year to $121.46. We would expect stocks to post handsome gains if earnings even approach the 2014 projection.

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