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TSC Ratings' Updates: IBM

Net income fell to -$330 million in the most recent quarter from $52 million in the year-ago quarter, significantly underperforming the S&P 500 and the auto components industry. ROE also greatly decreased, a signal of major weakness. Goodyear's very high debt-to-equity ratio of 4.9 is higher than the industry average, implying very poor management of debt levels, and its poor quick ratio of 0.9 illustrates its inability to avoid short-term cash problems. The 11.6% gross profit margin is extremely low, having decreased from the same period last year.

Shares have tumbled by 76.3% over the past year, underperforming the S&P 500, and EPS are down 607.4% compared with the year-earlier quarter. The fact that the stock has come down in price over the past year could be one of the factors that may help make the stock attractive down the road, but right now, we believe that it is too soon to buy.

We've upgraded IBM (IBM) from hold to buy, driven by its impressive record of earnings per share growth, increase in net income, notable return on equity, expanding profit margins and relatively strong performance when compared with the S&P 500 during the past year. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

EPS rose by 17.1% in the most recent quarter compared with the year-ago quarter, and we expect the company's two-year pattern of positive EPS growth to continue. Net income rose by 12% compared with the year-ago quarter, from $3.95 billion to $4.4 billion, greatly exceeding that of the S&P 500 but underperforming the computer and peripherals industry average. ROE also greatly increased, a signal of significant strength. Revenue fell by 6.4%. IBM's 47.2% gross profit margin is strong, though it has decreased from the year-ago quarter. The 16.4% net profit margin compares favorably with the industry average.

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