Is IBM a Good Stock to Buy?

International Business Machines Corp. (NYSE:IBM)’s stock price did take a hit during the financial crisis, but the company has since recovered and it is currently up 84% since five years ago following a more or less successful conversion towards more of a software and services focus. Last year revenue declined 2% from its levels in 2011, but the company reduced its costs of goods sold and as a result earnings actually increased by 5%. With share count decreasing as well (over the course of 2012 IBM used $12 billion- over half of cash flow from operations- on buybacks), earnings per share were $14.53. This was up from $13.25 in 2011 and $11.69 in 2012, showing that even with an unimpressive top line IBM has been able to grow EPS.

At its current market capitalization of about $240 billion, IBM trades at 15 times trailing earnings. We would expect continued share repurchases to increase earnings per share, but we would prefer for a company to also be growing its earnings. IBM did do that in 2012, and between that and further decreases in the number of shares outstanding we do think that it is a prospective value stock. However, we would be concerned that the company’s sales shrunk last year- if that continues, then increases in net income will not be sustainable. Analyst expectations imply a forward P/E of 12, after which point IBM would need very little if any earnings growth. We should also note that IBM’s beta is only 0.6, so it is not as exposed to broader market indices as some other technology stocks.

Warren Buffett is a fan of IBM: his holding company, Berkshire Hathaway, had over 68 million shares of the stock in its portfolio at the end of December (see Buffett’s stock picks). This was by far the largest holding out of the hedge funds and other notable investors which we track in our database of 13F filings. Other owners of IBM included billionaire Ken Fisher’s Fisher Asset Management and David Shaw’s large hedge fund D.E. Shaw (find Fisher’s favorite stocks and research more stocks D.E. Shaw owns).

Accenture Plc (NYSE:ACN) and Hewlett-Packard Company (NYSE:HPQ) are two of the closest peers for IBM. Accenture carries a premium, with trailing and forward P/Es of 21 and 16 respectively. This seems like fairly high pricing, given that in the company’s most recent quarterly report (for the fiscal quarter ending in November 2012) earnings growth was only 9% compared to the same period in the previous fiscal year and revenue barely increased at all. As a result we would avoid the stock. Hewlett-Packard, because of its significant hardware business, has not been doing well in terms of profitability. Both its top and bottom lines showed a decrease in its last quarter (which ended in January) versus a year earlier. However, the stock is cheap enough at a forward P/E of 7 that it may be worth looking into the out of favor company to see if it can in fact be “less bad than expected” over the next couple years.