What happened
Shares of tech legend International Business Machines (IBM -1.05%) rose a respectable 2.9% through 12:05 p.m. ET after the company reported mixed earnings for its fiscal second quarter 2023.
Analysts had forecast IBM would earn only $2.01 per share in "adjusted" profits for the quarter, and IBM beat that guess with a stick, earning $2.18 per share. Sales that were supposed to approach $15.6 billion, however, fell just short of that mark, coming in at $15.5 billion instead.
So what
Wall Street didn't mind the revenue miss, however, with The Fly reporting that three separate analysts (Bank of America, BMO Capital, and Stifel) all hiked their price targets on the stock after earnings. Investors don't seem to mind much, either.
After all, while IBM's sales declined 0.4% year over year, this was mainly because of currency exchange rates. In "constant currency," IBM recorded revenue growth of 0.4%, arguably making this the second quarter of growth for the tech giant -- and perhaps the start of a trend. What's more, two of the company's three main business divisions (software and consulting) recorded revenue growth despite currency headwinds, with only the smallest division, infrastructure, seeing sales down (albeit down a sizable 15%).
Gross profit margin also improved, up 160 basis points at 54.9%, helping GAAP earnings to climb 13%. However, these bottom-line profits weren't quite as strong as the adjusted number suggests. Earnings per share were only $1.74.
Now what
Best of all was the forecast. Reinforcing the idea that revenue growth is a new -- and improving -- trend at IBM, management predicted that constant currency revenue will grow from 3% to 5% this year in comparison to 2022. And while management didn't give a forecast for GAAP earnings, it did say that free cash flow this year should approach $10.5 billion -- better than a 10% improvement year over year -- meaning that cash profits are growing at more than twice the pace of revenue growth.
Applied to the stock's current market capitalization, this means IBM stock is selling for a cheap 12.1 times current-year free cash flow -- not bad for a 10% grower paying a 4.9% dividend yield. The only caveat I'd add to that is that once you factor in IBM's $44 billion in net debt, its enterprise value grows past $171 billion, giving the stock an enterprise value-to-free cash flow ratio of 17.
Even valued on that more conservative metric, though, I see IBM stock today as not unreasonably priced. Not "cheap" exactly, but close enough to cheap that it's a stock worth watching, with the potential to become a buy on any pullback in price.
