International Business Machines Corporation (IBM) provides integrated solutions and services worldwide. The company has four operating segments: Software; Consulting; Infrastructure; and Financing. The stock has gained 5% over the past nine months to close its last trading session at $128.25.

The stock market has been rebounding lately due to impressive tech earnings. Moreover, given IBM’s solid financial prospects, the stock has been upgraded from Neutral to Buy in our proprietary POWR Ratings system.

Arvind Krishna, IBM chairman, and chief executive officer said, “In the quarter, we delivered good revenue performance with balanced growth across our geographies, driven by client demand for our hybrid cloud and AI offerings.”

He also added, “With our first half results, we continue to expect full-year revenue growth at the high end of our mid-single digit model.”

The company now expects $10 billion in free cash flow in 2022, down from its previous guidance of $10 billion to $10.5 billion, citing the strong dollar and the suspension of business in Russia as possible reasons. However, IBM’s $2.31 earnings per share for the quarter beat analysts’ estimate of $2.27.

Here is what could shape IBM’s performance in the near term:

Latest Developments

In July, IBM announced a significant expansion of its Power10 server line with the introduction of mid-range and scale-out systems to modernize, protect and automate business applications and IT operations. The new Power10 servers combine performance, scalability, and flexibility with new pay-as-you-go consumption offerings for clients looking to deploy new services quickly across multiple environments.

Last month, IBM and SL Green Realty Corp. (SLG), Manhattan’s largest office landlord, announced that SL Green is leveraging IBM sustainability software to assist in advancing their company’s environmental, social, and governance (ESG) strategy.

SL Green will use software from Envizi, an IBM Company, to better understand and report on its environmental initiatives, identify opportunities for greater efficiency, and further drive sustainability across its large-scale real estate operations.

Robust Financials

IBM’s total revenue increased 9.3% year-over-year to $15.54 billion for the second quarter ended June 30, 2022. Its income from continuing operations grew 80.9% from its year-ago value to $1.47 billion, while its adjusted net income amounted to $2.10 billion, up 45% from its prior-year quarter. The company’s adjusted EPS rose 43% year-over-year to $2.31.

Strong Profitability

IBM’s trailing-12-month net income margin of 9.36% is 102.8% higher than the industry average of 4.62%. In addition, its trailing-12-month gross profit margin of 54.01% is 6.6% higher than the 50.67% industry average. Also, its trailing-12-month ROE, ROC, and ROA are 300%, 26.8%, and 50.3% higher than the respective industry averages.

Discounted Valuation

In terms of 20.24X forward P/E, the stock is trading 5.6% lower than its industry average of 21.44x. Also, its 2.68x EV/Sales is trading 5.6% lower than its industry average of 2.83x. Its 1.91x forward Price/Sales is trading 33.5% lower than its industry average of 2.88x.

Impressive Growth Prospects

Street expects IBM’s revenues to rise 5.1% in the current year and 3.3% next year. The EPS is expected to rise 18.9% in the current year and 8.8% next year.

In addition, IBM’s EPS is expected to rise at a 9% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in each of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Out of the 10 Wall Street analysts that rated IBM, five rated it Buy, and four rated it hold. The 12-month median price target of $146.88 indicates a 14.5% potential upside. The price targets range from a low of $118.00 to a high of $160.00.

POWR Ratings Reflect Solid Prospects

IBM has an overall B grade, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. IBM has a B grade for Value and Quality. IBM’s lower-than-industry valuation multiples are in sync with its Value grade. Also, its higher-than-industry profitability is consistent with its Quality grade.

Among the 81 stocks in the C-rated Technology – Services industry, IBM is ranked #18.

Beyond what I stated above, we have graded IBM for Growth, Sentiment, Stability, and Momentum. Get all IBM ratings here.

Bottom Line

IBM’s robust financial performance, impressive revenue growth across all its segments, and lower-than-industry valuation reflect its solid positioning to survive the market volatility. Therefore, we think it could be wise to scoop up its shares.

How does International Business Machines Corporation (IBM) Stack Up Against its Peers?

IBM has an overall POWR Rating of B, which equates to a Buy. Check out these other stocks within the Technology – Services industry with A (Strong Buy) ratings: Jabil Inc. (JBL), Celestica, Inc. (CLS), and Computer Task Group, Incorporated (CTG).

IBM shares were trading at $128.27 per share on Monday afternoon, up $0.02 (+0.02%). Year-to-date, IBM has declined -1.70%, versus a -16.37% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing. More...

More Resources for the Stocks in this Article