Has Big Blue's Big Rebound Finally Failed the Dow?

Shares of IBM (NYSE: IBM  ) hit a 52-week high yesterday, but after years of thrashing the Dow Jones Industrial Average (INDEX: ^DJI  ) it's been a part of since 1979, it's finally looking mortal. The company's past-year growth has barely kept pace with the index's gains. Is IBM's market-beating run over, or does it have enough fuel left to take off again? Let's dig into some of IBM's key details and compare them to those of its Dow tech peers to find out.

How it got here
IBM was once one of the Dow's strongest performers, and certainly the best in its high-tech peer group. As the economy limped its way back to the starting line in 2009, IBM was already halfway down the course:

IBM Total Return Price data by YCharts.

The addition of Cisco (Nasdaq: CSCO  ) on June 8, 2009 has been a drag on the Dow ever since -- until this year.

IBM Total Return Price data by YCharts.

IBM's long streak of dragging the Dow upward ended this year. Although IBM's stock continues to reach new highs, it's suddenly looking up at a highflying Dow -- and at a surging Cisco, which has enjoyed heightened investor interest after pairing a big dividend increase with strong second-quarter performance. Big Blue's now neck and neck with fellow Dow tech leader Microsoft (Nasdaq: MSFT  ) for the past year, and if Intel (Nasdaq: INTC  ) hadn't limped its way through an underwhelming (for Intel, anyway) second quarter, the chipmaker might still be ahead of IBM as well.

What gives? Let's take a look at how these companies stack up with regard to their progress across some important bottom-line metrics. If we can find a discrepancy, it'll be a lot easier to explain what's happening.

What you need to know
Rather than simply look at where each company stands today, we should examine how it's gotten here. IBM has been a five-year leader but a one-year laggard, so let's compare its progress over the past five years to its present position:

Company

P/E Ratio Today

P/E Ratio on This Day in 2008

Five-Year Total EPS Growth

Past-Year EPS Growth

IBM

15.1

12.2

91.6%

11.8%

Cisco

12.7

15.7

16.4%

27.4%

Microsoft

14.6

13.7

13.6%

(25.7%)

Intel

9.3

13.4

100%

8.8%

Sources: Wolfram Alpha and YCharts.

Microsoft's multibillion-dollar tax write-off in the second quarter skewed its P/E to the high side. If we use a normalized P/E, Microsoft's shrinks to a puny 10.8. That makes IBM the only one of the four to have a higher P/E ratio today than it did five years ago, coming out of a deep recession. Its impressive earnings-per-share growth also slowed down quite a bit this year.

Investors keep hearing about lagging PC makers trying to "pull an IBM" and reinvent themselves as software-and-services leaders -- with the big fat margins to back it up. This isn't a new trend, either. Cisco's cloud-computing initiative and Microsoft's energetic push into enterprise services are just two examples of the many competitive challenges IBM faces in its core markets.

IBM has had a long growth runway from hardware to software and services since it sold off its PC business to Lenovo in 2005, but businesses mature, and it appears that we're seeing the maturity of IBM as a global services company. Its competitors may not all be successful at chipping away at IBM's services leadership, but a thousand paper cuts can be just as painful as one big gash.

What's next?
It's fair to expect steady gains from IBM in the years to come, but it may finally have reached the limits of the market's optimism. I wouldn't be surprised if its P/E started to fall back toward earlier norms, and its upcoming earnings reports should prove informative in terms of conveying IBM's ability to fend off an ever-growing list of hungry tech competitors. IBM is still one of the Dow's strongest stocks, but it may no longer be the growth engine it once was.

Investors may even be tiring of IBM's low-for-the-Dow dividend payout, which doesn't even crack a 2% yield at current stock prices. Yield-hungry investors are demanding more, and they're looking for dividend stocks that combine IBM-like price appreciation with yields at 3% or more. The Fool has identified three great choices for your dividend-chasing dollars, and we've made all the information available, at no cost, in our popular free report on "The 3 Dow Stocks Dividend Investors Need."

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Intel, Cisco Systems, Microsoft, and International Business Machines. Motley Fool newsletter services have recommended buying shares of Intel. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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