IBM shares have fallen in the past 5 years
The current dividend yield is 5.2%
Wall Street's consensus view remains bullish
The market-implied outlook (calculated from option prices) is slightly bearish for 2022
As December draws to a close, International Business Machines (NYSE:) has bounced up from the YTD low of $115.81 on November 26, so IBM's 12-month total return is now at 11.7%.
Even at its current dividend yield of 5.2%, IBM's 12-month total return is less than half that of the S&P 500. IBM shares have totaled -0.17% over the past 5 years delivered per year, a period exceeding which averages more than 17% per year. The opportunity costs to investors during this period are enormous. the information technology service provider's position as an industry innovator and leader. The company has lagged behind in scaling cloud services, but has since made progress in this important area. IBM reported disappointing Q3 on October 20, leading to a stock sell-off.
There are many historical examples of leading companies failing to innovate and keep up with their markets. The classic paradigm for explaining how this happens is outlined in The Innovator's Dilemma by Clayton M. Christensen. IBM has seen similar major shifts in direction in the past, but the market seems to be losing patience.
I last analyzed IBM on August 25, almost 4 months ago. At that time, the forward dividend yield was 4.7% and the P/E ratio was 13. The consensus assessment of Wall Street analysts was bullish. Today, the price-earnings ratio is 12.6 and the forward return is 5.2%.
At the time, I gave a neutral rating and an important factor in my decision to ignore the bullish view of the analysts was that the options The options market provides important information about what the market expects from a stock. The price of an option on a stock reflects the market consensus estimate of the probability that the stock price will rise above (call option) or below (put option) (put option) a certain level (the option's strike price) between now and when the option expires. By analyzing the prices of call and put options on a series of strikes, all with the same expiration date, it is possible to calculate a probabilistic price return forecast that reconciles option prices. market-implied outlook and represents the consensus view of the options market. At the end of August, the market implied 9.7-month outlook to June 17, 2022 (calculated on options expiring on that date) indicated increased chances of price declines. In the (roughly) 4 months since that analysis, IBM's price has fallen 5.8%. Wall Street's consensus outlook. While IBM looks cheap on fundamentals, the main unknowns are revenue and revenue growth. For this one, the most sensible approach is to examine the range of expected values ??as reflected in these two forms of consensus forecasting. Wall Street Analyst Consensus Outlook for IBM E-Trade calculates the Wall Street consensus outlook by pooling the views of 8 ranked analysts who have published ratings and pricing targets for IBM in the past 90 days. The consensus outlook is bullish and the consensus price target for 12 months is $155.16, 23.46% above the current share price. Of the 8 analysts, 5 are bullish and 3 neutral. When I analyzed IBM on Aug. 25, the consensus price target was $154.33, so the analysts' view has barely changed in the past 4 months, even after the disappointing revenue report. the views of 19 analysts. The consensus rating is bullish and the 12 month consensus price target is $145.35, 15.39% above the current share price. Unlike E-Trade's analyst cohort, the number of analysts assigning a neutral rating is significantly greater than the number of analysts assigning a buy rating. Investing.com
These two versions of the Wall Street consensus agree on a bullish rating and that stocks expect double-digit price appreciation potential for the coming year, although they differ slightly in magnitude. Based on the consensus on 12-month price targets from E-Trade and Investing.com (19.4%), the expected total return (including the dividend) is 24.6%.
Market-Implied Outlook for IBM
I calculated the market implied outlook for the 5.9 month period between now and June 17, 2022 by analyzing the prices of options expiring on that date. I also generated the 13-month market-implied outlook using options expiring January 20, 2022. I selected options on these two expiration dates to provide a mid-2022 and full-year view.
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Source:Author:4590and symmetrical prospects[impactcalculationsoftheauthorshipcalculationsusing4590andyymmetry] the spike in opportunities has tilted slightly to favor negative returns. The annualized volatility calculated from the distribution is 27.1%.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative yield side of the distribution around the vertical axis (see chart below).
IBM market implied price return probabilities from now until June 17, 2022
Source: Author's calculations using option quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis.
From this view it is clear that the probabilities for negative returns are slightly greater than for positive returns. The theory suggests that the market-implied outlook tends to be biased to favor negative returns because investors tend to be risk averse and thus willing to pay more than fair value for downside protection (put options). There is no robust way to test this bias. However, given the potential for a negative tilt, this market-implied outlook is best interpreted as neutral. somewhat bearish. The relative spread between the chances of positive and negative returns is more pronounced. There is a clear, albeit modest, spike in probability corresponding to a price return of -8% for this period. The annualized volatility calculated on the basis of this distribution is 26.7%. The negative return side of the distribution is rotated about the vertical axis.
The market implied outlook for 2022 is neutral to the middle of the year, but slightly bearish for the year as a whole. Expected annualized volatility, around 27%, is not particularly high or low for an individual large-cap stock. scale migration to the cloud. While the dividend yield is high and the current valuation low, there are concerns that IBM could become a value trap. The consensus of Wall Street analysts is optimistic, with an expected 12-month total return of nearly 25%. This size of earnings requires evidence of substantial earnings growth. Unlike Wall Street, the market-implied outlook for IBM for the coming year is somewhat bearish, with an increased likelihood of price declines. Given the challenges associated with changing the direction of large companies, as well as the speed at which the cloud economy is advancing, it's hard to be very optimistic about IBM. By balancing Wall Street's bullish outlook with the options market's slightly bearish outlook, I maintain my neutral view of IBM.
