Albert, our analyst is publishing this report today...I have been pushing the stock for few weeks...still like the story, momentum is really changing and IBM could be one of the big name of 2014...have a look to this report
Relative Value: IBM - the fundamental case
BUY February 18, 2014
IBM is successfully transforming itself into a software and service business with focus on high growth markets. IBM is expanding (organically and via acquisitions) into high value software and service businesses and high growth markets (BRICS and Africa) while systematically exiting underperforming hardware business (latest being x86 server business). By 2015, IBM expects to generate ~30% of its revenues from high growth markets while around 90% of its pre-tax profits from software and service businesses. By 2015, IBM aims to grow its operating EPS to $20 from $11.67 in 2010. In the latest results release (FY2013), IBM reiterated that it is on course to achieve this target. The ongoing transformation has not affected IBM's market position. IBM continues to maintain its leadership positions (according to Gartner Magic Quadrants) in various software and service segments. In addition, it also has a patent leadership in the world with over 6,400 patents vs Samsung's 5,000 patents. Relative valuation screens suggest a mixed picture on IBM's valuations. EV/FY2 Sales vs Operating margin (FY2) screen (R-square: 0.95) suggests a slight overvaluation while PBR vs ROC screen (R-square: 0.83) suggests a slight undervaluation. Oracle remains in the undervaluation territory on both these screens. The operating profit growth (3-year forward CAGR) vs FY2 PE screen is not that meaningful; however, it can be observed from the chart that low growth players (such as CSCO, MSFT) trades at better PE multiples than IBM. A sum-of-part valuation suggests a target price of $166 a share, which is around 6% below the current price. However, we note that this does not capture the value of the patent portfolio at IBM.
In addition, we note that long-term relative charts of IBM PE vs S&P500 PE and IBM PE vs PE of key peers (MSFT, INTC, ORCL, and CSCO) are all heading towards record low levels, particularly so in the case of IBM PE vs S&P500 PE, in which the ratio is near its lowest point since 1994. Hence, on a long-term PE relative valuation basis, IBM looks significantly undervalued. Similarly, the relative dividend yield of IBM vs S&P500 is at its highest level since 1994.
Given the likely multiple expansion due to a higher software content, IBM's growth targets and share repurchases, we derive a NAV for IBM of about $210-$220/share.
FULL REPORT ATTACHED