A BOTTOM-FISHER'S BEST CATCH MIGHT BE BIG BLUE
For month after exasperating month, Wall Street has been treated to a true-life drama: Waiting for Big Blue. It's becoming awfully monotonous. IBM's earnings are pummeled in Europe. Its stock falls. Analysts question the dividend. Its stock falls. Nothing happens. Its stock falls. Today, IBM's shares are down 27% in 1992, to about 65--a 10-year low. And Big Blue's 800,000 shareholders are still waiting--for their misery to end.
Well, there are promising signs that the dreary saga of IBM's stock is finally reaching a denouement. For one thing, a host of widely accepted indicators are boding well for the computer giant as a contrarian stock play. And against-the-grain investors have another major source of cheer--the dour stance of the dozens of analysts who follow IBM. With a smattering of exceptions--notably Don Young of Shearson Lehman Brothers Inc. and Mark C. Jordan of A.G. Edwards & Sons Inc.--analysts have become indifferent or even hostile.
MASS MISS. That puts them in a peculiar position. One of the Street's abiding truths is that when analysts all feel the same way, good or bad, they have a tendency to be wrong. "Generally speaking, when you see such negative sentiment, it represents a buying opportunity," concedes William Milton, a Brown Brothers Harriman & Co. analyst who was one of the first to turn sour on Big Blue and is still skeptical about the computer giant's prospects.
The valuation numbers certainly seem to stack up in IBM's favor lately. Its dividend yield--7.4%--is almost five percentage points higher than the yield of the Standard & Poor's 500-stock index and is one of the highest to be found even among utilities. Its price-earnings ratio of 14, based on the average of analysts' estimates for 1992 earnings, is well below the S&P 500's overall p-e of 23. And IBM is trading at just a hair over the value of its assets as stated in its balance sheets--a price-to-book ratio that has begun to convince some market-watchers that IBM is bottoming out and could easily rise from here. "I personally think it has fallen so far that IBM is getting to be a value stock," says E. Michael Metz, chief investment strategist at Oppenheimer & Co.
True, analysts have been casting doubt on the future of Big Blue's dividend. They note that the $4.84-a-share payout actually exceeds the $4.68 a share that IBM is expected to earn in 1992, and it will soak up two-thirds of the $6.26 a share in profits expected in 1993. But a company spokesperson reaffirms IBM's longstanding contention that it has "no plans and no need to cut the dividend." Even the most bearish analysts agree that a dividend cut is already reflected in the share price and that a resurgence in confidence in the dividend stands to boost the share price--to perhaps $80 or more, in Young's view. "The company has been very, very vocal about the dividend, and that gives them an almost fiduciary responsibility to their shareholders," asserts John B. Jones Jr., who follows IBM for Salomon Brothers Inc.
Another potential source of cheer is the possibility of a breakup of the company. The idea would be to spin off, say, the competition-plagued PC operations, as well as the company's financial subsidiaries. Such a move would eliminate a drag on earnings, reduce debt, and give the market more confidence in the dividend. Oppenheimer's Metz believes that a split-up IBM might be worth as much as $90 a share.
The bullish scenario is tempting. But is it credible? After all, IBM has appeared to be a "screaming buy" by contrarians in the past--and investors have wound up screaming. Over the short term, Big Blue shares will probably be depressed until New Year's Eve by tax-motivated selling. That could keep the shares moving south, perhaps into the 50s. Meanwhile, the sore point that has plagued IBM--crummy earnings--remains an open question. Negative earnings surprises have repeatedly sent IBM shares tumbling. "What scares me is fundamental--the deterioration in demand for products and services," says Milton. "I cut my earnings estimate for the fourth quarter recently, but I'm not sure that was enough of a cut." Of course, analysts have been proven wrong about IBM time and again. Heaven help Big Blue if this time they are right.Gary Weiss in New York