Towards the end of last year, I added two new positions. With Ameritrade moving to $0 commissions I was able to average in a share or two per week. I eventually built up smaller positions in Honeywell (HON) and Cracker Barrel (CBRL). Honeywell is one of the highest quality industrial companies in the world and thus carries a rich valuation. And while Cracker Barrell is more moderately valued, it was still trading near all-time highs. However, for the month of January we have been presented with the Coronavirus opportunity. Stocks are declining and value is more accessible. This was one of the reasons I was able to take a new core position in International Business Machines (IBM).
International Business Machines Corporation is a global supplier of computer systems and software. The company operates in 177 countries, has over 350,000 employees, and earned 9262 U.S. patents in 2019. When people think of IBM they may remember the Thinkpad. Other products IBM invented/produced include the floppy disk, hard disk drive, ATM machine, magnetic strip cards, and much more. The company has reinvented itself dozens of times since its founding in 1911. Seventy percent of its operations are outside the US., adding geographical diversification to my portfolio. Unlike my other big-tech play, Apple, you typically don’t see what IBM does day to day. The company is primarily a B2B and sort of operates behind the scenes.
What attracted me to IBM was the lower valuation. IBM carries a low P/E of 13, a dividend yield of 4.6%, and a modest payout ratio of 50%. The company also appears to have finally turned around their business. After years of stagnation, IBM delivered solid earnings in the wake of its recent Red Hat acquisition. The $34 billion acquisition completed last summer allowed IBM to expand gross margin by “230 basis points”. Revenue rose YOY to $21.78 billion driven by cognitive solutions and cloud computing. Q4 net income came in at $4.11/share compared to $2.15/share a year ago. Looking ahead, the company is expected “sustained revenue growth in 2020”. And on Friday, IBM’s CEO Ginni Rometty agreed to step down after years of lackluster results.
With Rometty’s departure, IBM was the only stock trading in the green Friday. When a below average CEO departs, this typically indicates further changes in strategy. For now, earnings are once again positive despite slowing global economic growth. IBM also is strengthening its balance sheet by suspending its stock buyback program and paying down debt. The company also has a tremendous competitive advantage with its 1000s of patents. Since 1920, IBM earned 140,000+ U.S. patents. In addition, the trends are in IBM’s favor. Tech services & cloud platforms are 43% of the company’s business and this sector is only projected to grow in the future. Overall, IBM’s low valuation, high dividend, strong balance sheet, and competitive advantages all contributed to me purchasing the full $2,000 position.
DISCLAIMER: I am long on IBM, CBRL, and HON. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.