IBM: A Value Stock?

12/01/2015 7:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Following a decline in price over the past year, this leading technology firm can now be viewed as a value stock with the potential for significant gains, asserts Pat McKeough, editor of TSI Network.

In business since 1911, International Business Machines (IBM) has successfully adapted to changing conditions in business and technology over the past century.

IBM continues to transition from selling mainframes and consulting services to high-growth areas like cloud computing and analytics software, which processes huge amounts of data.

IBM has successfully shifted from unprofitable businesses to fast-growing ones in the past, but investors remain cautious of the latest changes in a time of rapidly evolving technology and customer demands.

That’s why the shares trade at just 9.5 times IBM’s forecast 2015 earnings. Meanwhile, IBM’s recent cost cuts are improving its efficiency: its gross profit margin improved to 50.0% from 49.2%.

That’s freeing up cash for acquisitions, share buybacks, and dividends: free cash flow (cash flow minus capital expenditures) rose 17.3% to $2.6 billion. The quarterly dividend of $1.30 yields 3.9%.

It is currently adding to its capacity in the fast-growing areas of cloud computing, mobile and analytics, including analytic software for the Internet of Things.

As part of its plan to expand cloud computing operations, IBM is setting up a new division to develop software that can analyze data from a variety of Internet-connected devices, including smartphones, tablets, vehicles, and appliances.

This Internet of Things could total over 30 billion devices by 2020. Tapping into the information they generate will help IBM’s clients improve their products and make better decisions.

We still think IBM’s latest business transformation will be a success.

IBM is a buy for safety-conscious investors.

Recommendation in Canadian Wealth Advisor: Buy.

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