Think It’s a Good Time to Buy IBM? Experts Doubt It
Bargain hunting for International Business Machines stock after Tuesday’s debacle? Don’t even think about it, many Wall Street pros say: The once-proud computer giant’s share price could be headed as low as $40 before it bottoms.
Tuesday, IBM stock plummeted $6.75 to an 11-year-low of $56.125 in wild trading after the company gave its gloomiest assessment yet of its near-term business prospects. Despite plans for 25,000 new job cuts and nearly $6 billion in additional write-offs to trim its bloated corporate structure, there was no hint from management that any earnings turnaround is on the horizon.
Worse, IBM’s sudden admission that it may be forced to cut the annual cash dividend on its stock--now $4.84 a share--may have removed the only reason why many institutional and individual investors have held on for this long.
“This is flabbergasting,” said an angry Edgar Wachenheim, principal at Greenhaven Associates, a money management firm whose offices are near IBM’s Armonk, N.Y. headquarters. Just three weeks ago, he said, senior officials at IBM had assured him that the dividend was safe.
In the stock market, “once bitten, twice shy” is standard operating procedure. In IBM’s case, investors have been bitten so many times in recent years--forever expecting this long-revered company to return to past glory, only to be disappointed constantly--that Wall Street may now be losing all hope for a turnaround.
And while the time to buy a stock often is when the majority of investors give up on it, there are reasons to believe that the final capitulation of IBM shareholders is only now in process--and will take months or longer to play out.
Howard Gleicher, portfolio manager at $1.7-billion-asset Palley-Needelman Asset Management in Newport Beach, explains the thought process that has brought him, and many of his peers, full circle on IBM:
“We held it for a couple of years, thinking that the stock was cheap and that all the bad news was out,” he says. “But now, our conviction on what the company is doing (to fix itself) has gotten down to zero.”
Some Wall Streeters may argue that IBM stock now is ridiculously cheap, he adds, but that isn’t enough anymore to justify owning it. “Our style is one of buying cheap stocks, but cheap stocks that have some reason to go up in the near-term,” Gleicher says. That doesn’t describe IBM.
Indeed, many investors are beginning to accept that IBM may never be what it once was--and that its stock could languish for years. After all, this century has seen a long line of powerful companies slowly fade away to the shock of their investors, who wrongly assumed that a business’ size somehow correlates with its ability to survive.
It’s true, most analysts will admit, that IBM is doing many things right: Its software, mid-range computers and workstations are all excellent businesses. But they can’t make up for the disintegrating mainframe computer business, IBM’s bread and butter. Nor can niche successes hide the sad fact that IBM remains badly overstaffed, the legacy of a bygone era--when it called the shots in global technological change.
(Yet IBM still says it will try to avoid layoffs, losing jobs instead through attrition. That riles investors no end, especially now. “They’ve been protecting employees at the expense of the people who own the company!” steams Wachenheim.)
On a pure value-of-the-businesses basis, what is IBM stock worth? Wall Street pegs IBM’s book value at between $50 and $55 a share. In theory, the stock shouldn’t fall below that range.
But theory doesn’t apply anymore to IBM, many analysts say. Only reality counts, and the reality is that investors have no idea what this company is capable of earning in 1993 or beyond. If you have no earnings “visibility,” the market automatically assigns a minimum value to your stock.
One analyst, asking anonymity because his company has a business relationship with IBM, offered this sober assessment Tuesday: “I figure if they earn maybe $3 a share next year, and they slash the dividend in half, you’re looking at the stock going to the mid-$40s.”
Of course, if by some chance IBM’s remaining institutional and individual investors already assume that the earnings and dividend payoff will be minuscule in 1993, one could argue that those holders will figure there’s no compelling reason to bail out of the stock now, at an 11-year low.
But don’t underestimate the number of longtime IBM shareholders--especially slow-moving bank trust departments--that are only now coming to grips with the extent of IBM’s troubles, analysts warn. The easiest way to start those investors stampeding out of your stock is to hint at a dividend cut, which IBM did Tuesday. Though 12.2 million of IBM’s 572 million shares were dumped Tuesday, there’s plenty more where those came from.
What about the “ultimate solution” some experts bandy about--that IBM should be broken up into pieces, and that the value of the parts will be worth much more than the whole? There’s every likelihood that shell-shocked institutional holders--especially public pension funds--will mount a feverish campaign in the months ahead to replace IBM management and find some magic solution for the company’s problems. CalPERS, California’s public employee pension fund, is already known to be hot on IBM’s case.
But a breakup remains a long way off, if it ever happens. And in the meantime, one analyst says, investors who ponder IBM will keep coming back to the same sad facts: “It’s too big, it’s too ugly, and too many things can go wrong.”
Who Owns IBM Here is a list of some of the largest institutional holders of IBM stock as of Sept. 30. Many of these institutions don’t own stock themselves, but rather hold it in trust for clients--pension funds, corporations or individuals. This list isn’t all inclusive: Some larger owners may not be on it. Also, some may since have sold shares or bought more.
IBM Shares Held Shares Added or Institution at Sept. 30 Sold in 3rd Qtr. Bankers Trust N.Y. 11,138,000 -546,000 Capital Research & Management 10,902,000 +580,000 Wells Fargo Institutional Trust 10,804,000 +7,000 Mellon Bank 6,151,000 -82,000 Michigan State Treasurer (pension) 5,492,000 no change College Retirement Equities Fund 5,274,000 +1,707,000 Chemical Banking 4,300,000 -90,000 N.Y. State Common Retirement Fund 4,261,000 no change N.Y. State Teachers 3,691,000 no change Univ. of California 3,246,000 no change Fidelity Management 3,151,000 no change Calif. Public Employees Retire. 3,083,000 no change Boston Co. 3,029,000 -1,416,000 Calif. Teachers Retirement 2,728,000 +32,000
Source: CDA Investment Technologies, from SEC filings
