International Business Machines Corp

IBM Details

Key Positives:

Lower Gross Margin (56.9.6% in 4QFY21 vs 114.3% in 3QFY21)

Key Negatives:

Higher Asset / Equity Ratio (6.98x in 4QFY21 vs Industry Median of 2.27x)

International Business Machines Corp. (NYQ: IBM): Company provides integrated solutions and services worldwide. Its Cloud & Cognitive Software segment offers software for vertical and domain-specific solutions in various application areas; customer information control system and storage, and analytics and integration software solutions to support client mission on-premise workloads in banking, airline, and retail industries. The company was incorporated in 1911 and is headquartered in Armonk, New York..

What should investor make an exit?

• Topline and bottom divergence: On January 25, 2021, IBM reported its fourth-quarter earnings, stating its Net Income of USD 2.33 billion or USD 2.57 per share as compared with USD 1.35 billion or USD 1.51 per share in the similar quarter of FY2020. The swell in the Net Income and EPS suggests the ample juice to be squeezed in the operations, but it doesn’t coincide with the decline in the top line “Revenue”, which shrank to USD 16.69 billion for the quarter ending December 2021 from USD 20.36 billion in previous year similar quarter. The decline in revenues and a similar increase in profits gives the idea of cost-cutting and improving efficiencies but not sustainable in long term.
• Decline in Return on Capital Employed: the pretax income IBM earned on its capital invested in its business came around 8.2% which is lower as compared to the IT industry average of 14%.
• The advent of New Technology and the Great Resignation: The IT sector is always prone to the advent of various technologies, shaving off the current ones in the mid to long term, thereby incorporating extensive as well as expensive training for the upliftment of the skill sets of its employees. Further, the higher attrition rate with increase in cost to retain employees amid the Great Resignation, is impacting the margins which will be showcased in the coming quarters.

Valuation Methodology: Price/Earning Per-share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

IBM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

IBM's stock price rose 11.35% in the past three months and is currently facing multiple resistance at these levels. The stock is testing the 200 DMA, and if the prices dive to the South, lasting prolonged effects in the near to long term, keeping the devastating sell-off in the Technology sector off-late. The Relative Strength Index is directness as it's between the range and shows the reading of 57.04. We have valued the stock using the Price/Earning per share based on relative valuation methodology and arrived at a target price of USD 117.16, and the current price of USD 134.35 seems too stretched, hinting of further frothy valuations around the staggering prices.

Considering one of the worst sell-offs in the IT space, the rising cost of employee retention, and hiring new faces in the company, the evaporating flavor of revenue growth pushes the valuation at unsustainable levels. Hence, we recommend a "Sell" rating on the stock at the price of USD 134.35, up 0.07% as of January 27, 2022 at 12:07 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

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