Over the next week 24/7 Wall St. will set mid-year price targets (June, 30, 2007) for the sixty most widely traded stocks. These targets will be based on past price performance, industry activity, forward projections of financial performance, outside analyst opinions, and research conducted for doing past articles on these firms. The price targets assume flat markets over the next six months. In other words, if the Nasdaq moved up 25% between now and mid-year, the target share price targets would probably be too low. If the market moved down by 20%, they would probably be too high
International Business Machines (IBM). For five years, IBM has done worse than stand still. It is down about 20%. Ditto for two years, Stock flat with most indices up 15% to 20%. Only in the last three months has the stock really begun to outperform the market.
Can it last? There are a growing number of believers. UBS recently upgraded the stock from "neutral" to "buy" based on improvements in its core business and the company’s move further into the software business.
There is some concern that IBM’s big services business has begun to slow, but software has picked up that slack. In the third quarter, the software business was up 12% to $4.4 billion. Even with improvements like this and the recent increase in its stock price, IBM still trades at a large P/E discount to SAP and Hewlett-Packard.
A look at the first three quarters of 2006 shows IBM’s hardware business shrinking. It global services renenue is flat. But, the software business continues to grow.
Given its size, IBM is not likely to grow quickly, but its software business should improve margins, and that may be enough to life the stock. A bit.
Factors that could improve stock price above forecast: IBM’s fortunes are tied to global IT spending. If that picks up more than expected in Q1 07, the stock should benefit. IBM is also working on its cost structure. An improvement in gross marging would help the stock.
Factors that could move the stock value below forecast. Hardware sales have been IBM’s weak point recently. If sales of large computers and servers slow down, or IBM loses share to HP, Sun, or Hitachi, the shares will come under pressure.
Douglas A. Mcntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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