IBM (IBM) - Get Report will report fourth-quarter 2015 earnings results after the closing bell Tuesday. With its shares down more than 37% from their all-time high of $213.30, there's considerably more value in IBM shares for the next 12 to 18 months than there are risks.
Sure, the beleaguered bellwether, which has been left behind by nimbler, cloud-based competitors like Salesforce.com (CRM) - Get Report , has frustrated investors with the pace of its turnaround. For the quarter and fiscal year that ended in December, respective earnings of $4.82 and $14.93 a share would mark declines of 17% and 9.6%, respectively. Likewise, annual revenue is projected to be down some 12%.
But unlike many of its competitors, IBM still generates tons of cash flow, and the New York-based tech giant is making moves to better compete in the realms of Big Data, the cloud and analytics -- areas that generate higher profit margins. So investors who are looking for a beaten-down stock with the potential to break out in 2016, and also offers a strong dividend yield, can do well here.
If you'd like another reason to buy, consider that at around $133 a share, IBM -- which lost 14.22% of its value in 2015, compared to the 0.73% decline in S&P 500 (SPX) index -- is trading near levels it has not seen since 2010. Take a look at the red arrow on the chart.
After August 2010, IBM stock gained almost 60%, reaching its all-time high of around $213. I'm not suggesting the stock will return to this level, but even if it only regains its 52-week high of $176, the return from current levels would be around 30%. And given how cheaply valued IBM shares are based on both its projected earnings and its cash flow, they are a relatively low-risk buy today.
IBM generated some $14 billion in free cash flow in the past four quarters, and in terms of its price/cash flow ratio, its stock is trading four points lower than another popular slow-growth tech name -- Intel (INTC) - Get Report , which is priced at 13 times the cash flow. And if IBM stock, which is priced at nine times fiscal 2016 earnings estimates of $15.11 a share, was priced on par with the rest of the S&P 500 index (forward P/E of 17), it would be trading today at around $256, not $132.
IBM may not be expected to grow, but thanks to partnerships with Apple (AAPL) - Get Report , as well as the various acquisitions it's made to bolster its capabilities in high-margin areas like consulting and cloud computing, it is no longer the hardware-driven entity it once was. Factor in the improvements IBM has made with Watson, business consulting, and other cloud-based services that help businesses achieve better outcomes, and Big Blue -- with easier quarterly comparisons ahead -- can be expected to generate tons of green in 2016.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
