Global provider of computer solutions and advanced technologies leader International Business Machines (IBM) earned $3.42 per share in fiscal Q3 2018 (vs. $3.41 est.). IBM had revenue of $18.8 billion, versus the $19.1 billion estimate, observes Chris Quigley, value investing expert and contributing editor to The Prudent Speculator.
Shares tumbled 7.6% following the announcement, and kept skidding over the balance of the week, as the company’s cloud growth disappointed investors and analysts.
CFO Jim Kavanaugh said, “Our performance through the first three quarters reflects the investments we’ve been making over the last couple of years, and actions to reposition the business. We’ve been rebuilding our innovation pipeline to address what our enterprise clients value in an IT industry that has been rapidly reordering technologies like AI, blockchain, cybersecurity delivered in hybrid cloud environments."
IBM shares are now off 16% year-to-date, and the stock was cheap before the year began. We think that the recent selloff is very much overdone, given that the company has been making operational progress on its Strategic Imperatives, including its faster-growing cloud business.
We understand that investor focus likely will remain on overall top-line growth, which is expected to be pedestrian for the foreseeable future, and cloud growth, which has done well, but evidently not well enough for analysts, given what IBM’s peers have accomplished.
We still think the company has plenty of opportunity to increase earnings per share and manage costs and we are flummoxed that IBM trades for a single-digit forward P/E ratio, while the recently increased dividend yield is now 4.9%.
We continue to remain patient with the stock and are pleased that management has a tremendous amount of free cash flow to put to work to reward patient investors. Our Target Price for IBM is $196.
