In 2017, Raymond James analyst Michael Litow wrote, “This is the ultimate ‘buy now’ investment opportunity.” As a 36-year-old investor, Harish Chandra is interested. Chandra invested $140,000 in IBM (NYSE: IBM ) in 1985 when it was trading at just $18 a share. Since then the stock has outperformed every other major stock market index, rising by an incredible 370% as of this writing. Nowadays, Chandra is one of the few investors who have bet on IBM stock more than once.
What is IBM’S Success Story?
Unlike many companies that peak in their third quarter and then see their shares decline as expectations are not met, IBM has bucked the trend. Over the past 36 years, IBM’s earnings-per-share estimates have increased by an average of 12% annually and 12 of its earnings releases have exceeded investors’ expectations. For fiscal year 2017, IBM posted nearly $14 billion in sales, an increase of 6% from the previous year. It also saw a 10% rise in its net income, $11.2 billion last year versus $10 billion in 2016. In both years, this was largely thanks to an increase in its consulting and systems integration services (taken from Investopedia.com).
The firm’s success is not hard to understand. It provides a diverse set of software and hardware that enables businesses to operate more efficiently. IBM software powers almost all of the world’s top 500 companies. According to Litow, IBM is one of the few companies in the industry that are actually benefiting from the growth of artificial intelligence (AI).
Where does IBM fit in the Industry?
Litow estimates that IBM’s sales will reach $17.5 billion and $18.5 billion this year and next. He also thinks the company will post an adjusted net income of $11.75 to $12.25 per share. It currently trades around $160 a share, so his projections are well within reach. The analyst also expects IBM’s revenue to increase at a 4% to 5% annual rate over the next few years.
Although he is bullish on IBM, Litow has significant concerns about the overall economy. He thinks this year could be challenging as global recession is a distinct possibility, especially as the U.S. economy appears to be losing its momentum. Still, he argues that as a business and investment, IBM is a stock to watch, especially since it has historically outperformed during times of economic uncertainty. In general, Litow favors buying stocks in niche industries that have steady revenue streams and trade at a low price-to-earnings (P/E) ratio. He also likes to invest in stocks with a history of strong earnings growth.
Why Should You Consider IBM As A Long-Term Investment?
In a challenging economic environment, many investors are searching for solid investments that they can hold for the long term. The uncertainty created by the ongoing trade tensions between the U.S. and China has made many CEOs and CFOs wary of making long-term purchasing decisions. Although the U.S. market has largely been insulated from the effects of the trade war so far, the very fact that it is being discussed at the highest levels of government is having serious ramifications for business decisions and investment opportunities. When discussing longer-term investing with clients, Litow tells them that even though the U.S. and China have been at odds for some time, there are positive signs that the two economic superpowers may be reaching a resolution to the issue. For example, IBM recently announced that it will expand its office in Chongqing, China, which will employ approximately 1,000 people. The company will also invest $1 billion in new, state-of-the-art factories that will manufacture circuit boards and other hardware for its next-generation computer system. These are crucial investments that show how seriously IBM takes its relationship with China and how confident it is in the future of the world’s largest country.
While it is still early in the game, it appears that China is working hard to repair the damage done by COVID-19. The number of new cases has dropped significantly, and the government even loosened the restrictions placed on businesses and residents by restricting the allowed travel and closing down many of the country’s borders. Since then, the Chinese economy has largely rebounded, and many companies, including IBM, have benefited. The international business of technology and hardware is expected to boom as a result of the China travel ban and the pandemic. As Litow told Business Insider, “I would look at the global demand for technology as a whole and not so much at either end. The demand for technology will grow, and the demand for IT services and hardware will grow at the same time.” The demand for technology services will increase as businesses and governments try to get back to work, and so will the demand for hardware such as servers and networking equipment. So while it is still too early to tell, one thing is for sure: this was not the future Litow, or any other 36-year-old, investor, expected to see.