The Bullish and Bearish Case for IBM in 2016

Now that 2015 has turned into 2016, the bull market feels as though it has been interrupted. It is far too soon to say the bull market is dead, because investors have a four-year track record of finding reasons to buy every single pullback.

24/7 Wall St. wanted to see what the strategists and analysts on Wall Street expect for the stock market in 2016, after the Dow Jones Industrial Average closed out the year at 17,425.03 for a change of -2.2% for the year. That index drop does not account for individual stock dividends, but International Business Machines Corp. (NYSE: IBM) closed out 2015 at $137.62, for a total return of -11.4%, if you include its dividend adjustments.

So, what lies ahead in 2016 for IBM? Its shares slid lower in the first week of 2016’s negativity, down to about $134.00. The year-end consensus analyst price target from Thomson Reuters of $148.85 would imply an expected total return for IBM of 11.9%, if you include its dividend yield of 3.78%.

While 2016 has gotten off to a very bumpy start, it seems almost a victory that IBM was down just over $3.00, after four rough days of trading to start the new year. IBM is a member of the 2016 Dogs of the Dow due to its negative returns and due to a dividend hike in 2015. IBM also keeps buying back its stock to shrink its float as part of a financial engineering effort.

Now consider that IBM’s 52-week range is $131.65 to $176.30. Despite having Warren Buffett act as a cheerleader who is continuing to grow his stake, the reality is that IBM is losing massive amounts of money on paper (as is Buffett) buying shares that have kept dropping. And defending IBM has been painful for analysts and investors alike — the bull/bear case for 2014 was for IBM shares to rise above $190, which did not happen in 2014, nor in 2015.

IBM’s core business is the issue. Its new growth initiatives are doing rather well, if they were their own company. That is a big if, as IBM’s core business is a stagnant IT services. The world’s growth markets slowing is not helping IBM at all, and the stronger dollar has only bitten more out of its earnings.

Another drag is what used to be a serious asset for IBM, and that its backlog for services. IBM said at the end of its third quarter in 2015 that its services backlog was $118 billion. This was up 1% if you adjust for currencies, but this used to run at $140 billion or so. Backlog is the orders in hand that have not yet been fulfilled and booked as revenues.

Now let’s look at IBM’s “strategic imperatives” revenue growth. It’s not enough to move the needle yet, but at the end of the third quarter of 2015 IBM said those were up 27% from the prior year, if you adjust for currencies (but up 17% without that adjustment). Cloud revenue was up more than 65% in 2015 at that time to $9.4 billion over trailing 12 months, and business analytics revenue was up 19%, if you adjust for currencies (or 9% as reported). Watson continues to grow as well, but the real growth for that will be in the years ahead.

IBM CEO Ginni Rommety finds her efforts and continued financial engineering in a precarious position. IBM screens out as being cheap at only nine times earnings, but that is due to financial engineering. Investors understand that the previously stated earnings goal of $20.00 was artificial, and Rommety did finally abandon that ridiculous effort. A recent SEC investigation might not sound that positive either.

With revenue in decline in recent years, investors just are not excited with an expected 2015 revenue drop and another in 2016. Those expectations were before the 2016 market sell-off looks like even slower growth world ahead.

Credit Suisse has been the most negative of all analysts, with its $125 formal price target. The few remaining bullish analysts have looked almost silly trying to defend IBM. That being said, IBM’s most bullish analyst target is a mere $170 — lower than its 52-week high.

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