Why It's Finally Time to Buy IBM This Time

If one Dow Jones industrials stock (at least aside from General Electric) has been the poster child for disappointing investors in recent years, International Business Machines Corp. (NYSE: IBM) probably comes to mind. Shares of Big Blue are currently down 11% from a year ago and they were last seen down 10% so far in 2018. There is an old saying that nothing lasts forever.

What if it is finally time for investors to buy shares of IBM? That’s the new verdict from Nomura/Instinet. The firm started IBM with a Buy rating and the firm issued a $160 price target.

Before investors jump in without consideration, it is important to recall that IBM has been dead money for years and that many analysts have tried to get in ahead of “the next big move higher” for IBM. So far, that trade has been a trip down the Boulevard of Broken Dreams — even to where Warren Buffett got suckered into thinking there was value before jettisoning his big investment in IBM shares. Also note that this new Buy rating comes with an upside call that is actually lower than the consensus analyst target price on Wall Street.

The Nomura/Instinet analyst call came from Jeffrey Kvaal. The report talked up a differentiated cloud solution from IBM, as well as durable growth in analytics, security growth and valuations not reflecting an improving outlook. His report said:

IBM has built the foundation for modest but sustained revenue growth. Its Strategic Imperatives revenue grouping is nearing 50% of sales and growing 10%, led by cloud, analytics, and security. This should easily offset upper-single-digit declines in legacy businesses. Along with healthy capital returns, we model ~5% EPS growth.

There is also a huge opportunity for Watson to grow the analytics business. Kvaal said:

Growth in analytics is durable. We believe integrating Watson into IBM’s $21 billion analytics business will sustain its ~5% growth rate. IBM is notably strong in health care; it is pushing into financials, IoT, and advertising, among other areas.

As far as what this translates to for investors: after a $137.48 close on Wednesday, that is 16% in implied upside to the $160 target on IBM. Then there is almost a 4.5% dividend yield to consider, and that would create 20% in upside for investors if the report turns out to be right. At this stage in the bull market, most new analyst ratings with Buy and Outperform ratings come with 8% to 10% in Dow and S&P 500 companies.

Many investors have been treating IBM as a value stock due to its valuation being so close to 10 times expected earnings. The problem is that IBM’s growth initiatives just so far have been unable to offset the drop in the core IT-services businesses as that segment continues to face pressure in a cloud and on-demand world.

IBM shares were last seen trading up 1.3% at $139.35 on Thursday morning. Big Blue has a 52-week trading range of $137.45 to $171.13. Its consensus analyst target price from Thomson Reuters was last seen at $168.30 ahead of the call, and the new consensus target price was $167.90.

Sponsored: Find a Qualified Financial Advisor

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.