The heat map reminds me of my early days as an engineer (about 22 years ago), when I used Shmooing Graphs to characterize and test computer memory chips.
In semiconductor manufacturing or testing, Shmooing graphs are used to identify margin of stability (guard bands) between the two logical states (on/off) of a transistor based on other parameters such as voltage which is swept from high-to-low or low-to-high to help determine margins between the two states and overall stability of the device.
In the case of stock price, I'm using Shmooing concept to identify margins of safety between two extreme price points while using 50% point as the demarcation line between Buy/Sell states.
A Green bar indicates the stock price distance from its 52-week low and proximity to Buy state.
When a stock gets expensive and trading at or near 52-week high, it gets a longer red bar and a shorter green bar, indicating the stock is in high demand and is trading at a premium price.
IBM falls under the top five cheap stocks as indicated by my Heat Map and therefore is a good candidate for further research.
If there is one reason to buy IBM, I think it's the "Blockchain"
According to research firm Juniper Research, IBM far outranks Microsoft as blockchain industry leader. This was evident by the fact that more than 40 percent of tech executives ranked IBM as top blockchain provider and only 20 percent said the same of competitor Microsoft.
How IBM benefits from blockchain?
Blockchain's market size is expected to grow rapidly in the near future with many companies trying to take advantage of the trend. The technology can be a single most important and fundamental innovation of our time that can help secure and manage other innovations of the future such as AI (Artificial Intelligence) and Autonomous cars.
IBM is one of the first companies to start considering the technology for commercial applications, will profit from the blockchain technology significantly.
Below are some of the areas where IBM's Blockchain technology is making headway:
Tracking Food Contamination
IBM recently announced partnerships with Nestle, Uniliver, Wal-Mart, Kroger, Tyson Foods, McCormick, and several other food giants to help them automatically trace food movements and tackle contamination faster by using the blockchain technology.
Securing Identity Sharing Solutions
SecureKey Technologies, a digital identity and attribute sharing network, is testing a consumer digital identity network built on top of the IBM blockchain technology with banks in Canada. If successful, it can revolutionize how personal identity data of the customers are shared during financial transactions and could greatly reduce or even eliminate the theft of customer's confidential data.
SecureKey is discussing a blockchain based identity network built in partnership with Canadian banks BMO, CIBC, Desjardins, RBC, Scotiabank and TD Bank.
Tracking Carbon Credits
A Beijing-based Energy-Blockchain Labs Limited announced what it described as the "worlds first blockchain-based green assets trading platform" is deployed using IBM Blockchain technology.
Protecting Electronic Health Records
IBM's Watson Health artificial intelligence unit has signed a two-year joint development agreement with the U.S. Food and Drug Administration (FDA) to explore using blockchain technology to securely share patient data for medical research and other purposes.
These are just few of the many areas where blockchain can be used to enhance security and provide access control of sensitive data while providing immutable traceability of physical assets. It could very well be the next best thing since the invention of Internet.
Having reviewed importance of blockchain technology, let's look at the IBM stock valuation and dividend to determine whether it is a good long-term investment at the current price.
IBM Stock Valuation
2018 Fair Value Estimates
FastGraphs Fair Value Estimate based on 26 Analysts: $208.79
FastGraphs Fair Value Estimate based on 5-Yr Normal P/E: $158.69
MorningStar IBM stock Fair Value Estimate: $158
Most analysts are estimating higher fair value at $208.79vs. the 5-Year Normal P/E multiple or MorningStar fair value estimate of $158.
This simply means that analysts are bullish in determining their fair value estimates based on future cash flows and earnings estimates.
I'm going to take the average of the above three estimates to come to a reasonable fair value for my IBM stock buying price target: Average Fair Value of $175.16
The average fair value gives me a nice discount of approx 19% based on IBM's current stock price of $146.77.
IBM Dividend Quality
IBM has a current yield of 4.09%, which is significantly higher than its 5 year average dividend yield of 2.70%. It is one of the few blue chip tech companies with a dividend above 4%.
IBM also has a 110 years of paying dividends with 13 years of consecutive dividend increase.
1-Yr DGR: 7.1%
3-Yr DGR: 12.3%
5-Yr DGR: 12.7%
Dividend Payout Ratios
2016 Earnings Payout Ratio: 40%
2016 FCF Payout Ratio: 41%
Overall, dividend looks well covered by both earnings and free-cash-flow and nicely growing at high single digit.
IBM has been in the midst of a long turnaround with 21 quarters of declining revenues. It is a big ship to turn, but the good news is that it is turning, though rather slowly.
The market has not been happy with the slow turnaround and has punished the stock considerably by slashing it nearly 20% from its 2016 highs of around $180/share price.
The stock is also showing signs of turnaround; however, there are still downwards risks.
The historical long-term bottom for IBM's P/E is around a multiple of 8.4, as indicated by the pink line on the chart above. There has been only two instances in the past 20 years when the stock traded at such low multiples, one during the 2009 recession and the other during January 2016 market correction (the two circles on the chart).
IBM's stock is currently trading at a P/E of around 10.6 which is about 20% higher than the historical bottom. This is a good indication of stock starting to turn around and potentially a good place to start a position.
I believe there is still some downward pressure on the stock and will likely remain so till the company can show growing sales. However, there are signs that the company is turning around due to progress it is making in the areas of AI and Blockchain technologies.
I'm long-term bullish on IBM and believe it will be a major player in Blockchain, Cloud, and AI technologies and the stock would greatly benefit from the growth in these future technology areas.
At a current yield of 4+%, I see IBM stock as a great long-term value with an excellent dividend and price growth prospects.
Disclosure: I currently own shares in IBM stock and will likely add more shares on the dips.
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer