IBM’s 31.4% return over the past six months has outpaced the S&P 500 by 26.9%, and its stock price has climbed to $289.50 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy IBM, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We’re glad investors have benefited from the price increase, but we’re cautious about IBM. Here are three reasons why you should be careful with IBM and a stock we’d rather own.
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. IBM struggled to consistently generate demand over the last five years as its sales dropped at a 1.3% annual rate. This was below our standards and is a sign of poor business quality.
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
IBM’s flat EPS over the last five years was weak. On the bright side, this performance was better than its 1.3% annualized revenue declines.
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
IBM historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.4%, somewhat low compared to the best business services companies that consistently pump out 25%+.
We cheer for all companies making their customers lives easier, but in the case of IBM, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 26.5× forward P/E (or $289.50 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in – we think there are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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