Over the past four years IBM stock has moved up from a low of about $75 to nearly $150. That means a perfectly timed investment would have doubled in 5 years. While it is unrealistic to expect to have perfectly timed the bottom and top of this stock's performance, there were plenty of entry and exit points that offered a good potential return over the past years. Is there the potential for this stock to double again over the next four years? Let's look at some of the reasons the stock may have performed so well over the past years and see if those (or other conditions) might exist to drive another doubling of the stock price.
Financial Strength
IBM has always been considered a solid blue chip company with a strong balance sheet. The financial crisis of the past years was a real life stress test of any global company's financial strength. IBM weathered this storm incredibly well. It maintained its dividend, improved its balance sheet and always generated strong free cash flow. An investor can look at a variety of metrics and ratios to measure the strength of a companies finances, but perhaps the best testimony to the strength of the their balance sheet is that they were recently able to issue bonds at 1%. The market has spoken. IBM's financial strength is just as good if not better than it was years ago.
Business Model
One of the key trends in technology is cloud computing. When the industry pundits discuss cloud computing they want to focus on companies that provide high profile, but somewhat isolated pieces of the cloud such as Akami, Salesforce.com, Rackspace, etc. When global companies think about cloud computing they think about scalable, core IT capabilities delivered seamlessly around the planet . Arguably, IBM provides a unique mix of products and services that meet the needs of global customers better/cheaper than anyone else. Other good companies like Accenture, HP, etc are still trying to cross the competitive moat represented by IBM's business model.
Earnings Predictibility
Several years ago IBM stated a goal of $10 in earnings by 2010. 2010 earnings will be about $11.50. IBM can make and achieve a multiple year forecast when many other tech firms don't seem to have visibility for the next quarter quarter because large piece of their revenue is tied to long-term, reliable contracts. Hence their backlog and shadow backlog is huge and very manageable. IBM's goal is $20 in earnings by 2015. Just like a few years ago, this goal seems achievable.
So four years ago IBM started with a strong balance sheet, a unique business model, and a well defined business goal and despite the “great recession” the stock doubled. Those same conditions exist today, and hence conceptually a doubling in price seems possible again. From a numbers perspective if IBM can achieve $20 a share in earnings on 2015 that represents about an 11.5% CAGR from today's level. With the current multiple of 12 that is a 4 year price target of about $240. If the multiple can expand to 15, the stock will have doubled again. Even if IBM does not achieve its goal and only get to $18/share in earnings and the market punishes IBM with a 10 multiple that would be a stock price of $180. That would not be a good result, but not terrible for a worse case scenario.
Trading plan: Hold IBM assuming it will compound at 11.5% over the next few years. If at any time the price increases to have hit a 20% CAGR lighten up on the position and wait for a pull-back to re-establish your position.
Disclosure: Long IBM
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