International Business Machienes (IBM) Undervalued

Drop on Earnings

IBM dropped significantly today when it reported its earnings, which were significantly less than the consensus analyst estimate. This major earnings failure comes at the same time as investors are beginning to question IBM’s sustainability and power; whether or not Big Blue really has the same ability to grow as it did before.

Business Transition

In actuality, IBM is not nearly the company it was before. The company is currently going through a huge transition from a hardware company to a software company, focusing on high growth areas such as the cloud. The company has already shed off many of their hardware businesses by selling them off, and today has even reported that they will pay GlobalFoundries $1.5 billion to take their semiconductor chip units, a part of the business that has been unprofitable for years.

Misguided Bearish thesis

The main argument against IBM is that their revenues have been falling for years now, and will likely continue into the future. That, however, is misguided, since the most fundamental reason that IBM’s revenues have been falling is because they have been going through this business transition, and need time to re-stabilize their business.

Low Valuations

At trailing and forward P/E ratios of just 10, IBM is exceptionally undervalued. This is a company that has major market share in a rapidly growing part of the tech industry: the cloud.The growth prospects and what IBM could do with their new business position are enormous, yet the market is valuing its growth potential like it’s nothing.

Shareholder Friendly

Also, IBM is a dividend aristocrat, meaning that the company has increased their dividends for more than 25 years in a row, adding up to a very nice flow of cash. The company is also a serial re-purchaser of their own stock. Spending billions of dollars in buybacks every year, the company is still speeding up their share repurchases, especially since they think shares are so undervalued now.

“Road Maps”

The company is also very good at setting goals and achieving them, never straying from the path to success. Management lays out what they call “road maps” every few years, which involve setting an EPS price target for the future years. They easily attained their last road map target a few years back, and are currently on a good track to surpass their 2014 target of $16 per share.

Warren Buffett

It’s also worth a mention that respected investor Warren Buffett also holds IBM as one of his core “Big Four” holdings. These Big Four stocks are four companies (WFC, KO, AXP, and IBM) that he has held through thick and thin, good and bad. These are companies that he expects to hold forever, and expects them to be extremely lucrative over that time period as well. He recently purchased IBM, but the other three were bought in the 1960s and 1980s, and have now netted him gains in the thousands of percentages and vastly outperformed the market. Also, IBM is a technology company, an industry that Buffett has long declared too hard to understand and changeable. The fact that IBM is one of the only tech companies in his entire portfolio shows that he has probably already done much research on the company and therefore trusts it above all others.

Conclusion

IBM is a great company that is trading at incredibly low valuations in the short-term. These valuations should stabilize to an acceptable level in the future, which should most likely also reflect some premiums because of Warren Buffett’s support of the company and it’s shareholder-friendly history. The current bearishness in the company is only an effect of revenues that have dropped in the short-term due to an inevitable company transition into the software business. This issue of revenues will come to pass when the company gets back on track with their business and finishes their transition into the software business. Investors should look to IBM for sustainability, growth, and undervaluation.

Halliburton (HAL) High Growth Prospects

Halliburton provides services to oil companies for the exploration and development of oil. The company’s share price has fallen considerably in the past few months due to a falling crude oil price, providing potential investors with an excellent opportunity for a buy.

American Oil Production

America is becoming much less reliant on foreign countries for oil, and this oil independence is causing the American oil production business to thrive. One of the prime benefactors of this shift in oil production is Halliburton, since they generate almost 50% of total revenues from America. their services and equipment are also of utmost importance when it comes to drilling and refining oil, so an increase in American oil production will likely provide a catalyst for a large uptrend in the share price. Halliburton’s ability to grow has already been shown in the past two years, when the company achieved 50% gains both years on the back of American oil production growth.

Undervalued by P/E Ratio

Halliburton’s 10-year and 5-year average P/E ratios are both around 15, while the current forward P/E ratio is just 10. This historically low P/E ratio is quite unjustified, as the current oil situation in America would only cause the company to have better prospects for the future, not the opposite. The market is currently pricing Halliburton for a 25% decline that would bring it back to its historic P/E ratio of 15, but the company’s future growth prospects look favorable for a high-growth scenario, which leads to the current stock valuation to be extremely conservative and inaccurate.

Short-Term Decline

In the past 3 months the company’s stock has already dropped 25% from highs due to a short-term worry that crude oil prices will continue to fall. This kind of a drop has plagued the entire energy sector, although the validity of the worries are very questionable. The oil bears are citing oversupply and under-demand as reasons to be short oil. However, taking a very conservative stance on the situation, oil companies have already been hammered by the fears of oil prices dropping and global economic worries, and are already priced at such absurd levels that they are already anticipating future losses. That means that the current valuations for oil companies are exceedingly low, built on fears that oil will head even lower, and already pricing in a further 15% or so of a drop in oil prices, This fear, however, is best categorized as a short-term worry that will dissipate within the next few months.

Halliburton is undervalued company because of short-term worries that will likely be gone in the next quarter or so. They also have considerable growth prospects because of America becoming more oil independent.