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Better Buy: Apple, Inc. vs. IBM

By Daniel Sparks - Apr 11, 2016 at 7:15PM

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Even after their recent run-up, both stocks are trading lower than they were a year ago. Is either a buy?

With their stocks falling 8% and 14%, respectively, during the past year, two of the most established names in tech -- International Business Machines (IBM 1.74%), or IBM, and Apple (AAPL 4.08%) -- are trading at very conservative valuations. Which is a better buy? Even more, are they both a buy?

AAPL Chart

AAPL data by YCharts

Looking at the two companies' recent growth, Apple easily stands out from IBM as the faster-growing company. In the trailing-12-month period, Apple's revenue and EPS jumped 18% and 27%, respectively. Meanwhile, IBM's revenue and EPS declined 12% and 13%, respectively, during the same period.

But the playing field levels out a bit when you look at the two company's current outlook for growth. IBM's full-year outlook for flat EPS growth, and Apple's expectations for current quarter revenue to decline from $58 billion in the year-ago quarter to $50 to $53 billion, highlight both company's challenges with growth in the near term.

Longer-term, which company could grow faster? Apple's recent rapid growth at lesast demonstrates it has the ability to grow significantly. But given how concentrated and volatile Apple's product portfolio is, there's more risk to revenue and EPS if one of its key product segments -- particularly its iPhone segment, which accounts for well over 60% of revenue -- faces headwinds. So, when it comes to analyzing both company's growth potential, it's really a question of choosing between IBM's steadier and more predictable business model and Apple's potentially significant growth paired with more uncertainty.

Image source: Apple.

Both IBM and Apple have characteristics of a "cheap" stock. The quickest way to illustrate the market's underwhelming expectations for their growth is with their price-to-earnings rations of 11.1 and 11.6, respectively, at the time of this writing. Similarly, their price-to-free cash flow ratios highlight investors conservatism toward their business prospects; IBM and Apple's price-to-free cash flow ratios are 11.1 and 9.6, respectively.

Looking at price-to-earnings and price-to-free cash flow ratios, neither Apple or IBM has a clear edge on the other. But as soon as you turn to the two companies' balance sheets, Apple's war chest begins to give it an advantage. Bolstered by its cash, Apple's price-to-book ratio is just 4.7. This compares to IBM's at 10.1.

It's no secret that Apple has built up an enormous chunk of cash on its balance sheet. The company ended its fiscal first quarter with a whopping $215.7 billion in cash and marketable securities. In other words, for every dollar of market capitalization, Apple has $0.35 in cash on its balance sheet.

Overall, Apple's heady balance sheet combined with its conservative valuation gives the tech giant a slight edge in valuation.

Buy both stocks?
When combining the two company's growth prospects and the premiums, or -- more accurately -- the lack or premiums -- the market is awarding them with, I'd dub Apple the better bet between the two. That said, as two established in their respective markets with brands, products, and services that are here to stay for years to come, both Apple and IBM appear to be attractive stocks at their current valuations.

For reference, the average price-to-earnings ratio of stocks in the S&P 500 index is 23.6 at the time of this writing. This puts market-leading IBM and Apple, with their price-to-earnings ratios at less than half of this level, in a whole different ball game than most of their peers in the index.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$149.64 (4.08%) $5.86
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$139.27 (1.74%) $2.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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