IBM (IBM): 2019 Top Picks' Mid-Year Update

07/09/2019 5:00 am EST

Focus: TECHNOLOGY

John Buckingham

Editor, The Prudent Speculator

John Buckingham, editor of The Prudent Speculator, chose IBM (IBM) as his favorite investment idea for 2019. The tech firm has since risen 21.3%. Here's the latest update from the money manager and value investor.

Despite IBM's gains over the first half of 2019, little has changed in our affection for the stock or our investment thesis for the provider of enterprise solutions, offering a broad portfolio of IT hardware, business and IT services, and a full suite of software solutions.

No doubt, Big Blue has struggled to keep up with the explosive growth of the Info Tech sector in recent years and we would like to see the top- and bottom-line grow faster, but we are pleased that the company’s Strategic Imperatives businesses (led by Analytics and Cloud) have steadily become a larger share of the overall sales pie.

We are also intrigued by the Red Hat acquisition that is expected to close later this year, as we remain enthused about the prospect that Red Hat’s OpenShift software runs on private clouds (owned by one company) or public clouds (like AWS or Microsoft Azure), and could finally let Watson, IBM’s learning engine, grow nearer to its potential.

Assuming it can close the Red Hat deal and overcome the integration risks, we believe it will be better able to keep up with its cloud computing peers.

True, IBM plans to suspend share repurchase in 2020 and 2021 as it pays down Red Hat debt in order to get back to its targeted leverage ratio, but the company has long been committed to returning cash to shareholders.

For example, $2.3 billion was doled out in Q1 2019, including $1.4 billion of dividends and over $900 million of gross share repurchases, bringing the total to $10.3 billion over the last 12 months. And at the end of Q1, there was $2.4 billion remaining under the buyback authorization.

IBM estimates that the global Cloud is only 20% built out, so there is plenty of growth potential, yet its stock trades for just 10 times trailing earnings and yields 4.8%. The company also expects to post full-year 2019 operating EPS of at least $13.90 and free cash flow of about $12 billion, both massive numbers!

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