Is IBM the Best Dow Jones Stock For Turnaround Investors?

IBM shares have lagged far behind the Dow over the last year or so. Is Big Blue poised for a turnaround -- or a meltdown?

Jun 10, 2014 at 2:00PM

It's no secret that IBM (NYSE:IBM) has left investors hurting recently. Since the company missed estimates and painted a bleak guidance picture in spring 2013, its shares have lagged far behind their Dow Jones (DJINDICES:^DJI) peers.

IBM Total Return Price Chart

IBM Total Return Price data by YCharts.

Is it time to give up on Big Blue? Or does CEO Ginni Rometty have a solid turnaround in store for patient investors?

Let's start with IBM's official strategy road map.

Big Blue publishes long-term strategy directions, and measures its performance against these stated goals. Crazy, I know, but this open hand hasn't stopped IBM from winning in the long term.

Source: IBM.

Above all else, IBM takes pride in its ability to "remix" its businesses. The growth you see in the chart above did not come from holding on to established markets for dear life, but from dropping underperformers to refocus on new growth opportunities.

Ten years ago, IBM's profit driver was an even blend of hardware, software, and services. Today, the low-margin hardware division is falling by the wayside as IBM pursues software and services with a single-minded passion.

Source: IBM.

In particular, IBM is building a portfolio of enterprise-class services on cloud-based platforms.

By the end of 2013, Big Blue had already spent $7 billion on research and investments in the cloud-computing market. The company holds more than 1,500 patents in this area, including research brought aboard in 15 cloud-focused acquisitions.

Forget the tried-and-true but also outdated one-stop shop idea. This is what IBM is doing now. Big Blue doesn't want to be the entire information technology sky anymore. It's all about the clouds.

It's a strong strategy with all kinds of long-term growth promise. But strategy changes can hurt, and this is no exception.

IBM remains committed to a five-year plan that always pointed to $20 of operating earnings per share in 2015. Last year, the company delivered operating EPS of $16.28, leaving a rather large gap to cover in the last two years. IBM is guiding to $17.80 in 2014 earnings, which would be a 9% annual jump. The remaining distance to cover in 2015, then, is a tough 12% earnings increase.

I'm confident that IBM will meet the $20 long-term target, but perhaps not in the most sustainable way.

Some analysts complain about IBM's "low-quality" earnings, and it's easy to see why. Between 2000 and 2013, the company collected $165 billion in free cash flow. It spent $32 billion on acquisitions, $30 billion on cutting dividend checks, and $59 billion for capital expenses. But IBM also funneled a staggering $108 billion into share buybacks.

Measuring these 14 years of ultragenerous buybacks against IBM's $186 billion market cap, you'll find the company has reduced its share count by 44%. Sometimes Big Blue had to borrow money to keep retiring shares -- and did it happily. The ever-shrinking share count has most certainly helped IBM meet its earnings goals. Not necessarily by making more money, but by moving the goal posts.

IBM Shares Outstanding Chart

IBM Shares Outstanding data by YCharts.

In the end, IBM investors must weigh Big Blue's flexibility against the potential for bottom-line trickery.

I'm convinced that IBM has chosen the right path toward long-term profits. My my, hey hey, cloud computing is here to stay, as Neil Young might put it.

But the big payoff might come a little too late to meet IBM's stated 2015 goal. That's why I wouldn't be surprised to see another massive buyback push, possibly powered by the current economy's large supply of low-interest debt.

If that scares you, feel free to stay away from IBM. Personally, I prefer to take the long view. Come back in five years, and I believe that Rometty's strategy will have played out as planned. This is a hardscrabble turnaround in the making.

I don't have a real-money position in IBM (yet!), but my CAPS portfolio will most certainly ride this turnaround for the next several years.

Warren Buffett just bought nearly 9 million shares of this company
Master investor Warren Buffett owns a massive stake in IBM -- but Big Blue is not his best idea right now. Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers