Annex Bulletin 2011-18                              December 1, 2011

A partially OPEN edition

Recent...

Happy Birthday, IBM! (IBM to turn 100 on June 16; what's the secret of its success?)

Apple Falls from Tree to Cloud, Then to Earth... with a Thud (Last major holdout joins race to cloud, but falls flat on first attempt)

INDUSTRY TRENDS

 

Updated 12/01/11, 3:30PM HST

Analysis of Global IT Leaders Stock and Business Performance

IBM on Cloud 9

Big Blue Best Performing Stock in 2011 among Top 15 Industry Leaders

HAIKU, Maui, Dec 1, 2011 - Move over Apple, Microsoft, Big Blue is back.  IBM is once again the leader of the pack. That's the bottom line of our latest analysis of the top 15 IT global leaders' stock and business performance.   Apple is still the most highly valued IT stock, but IBM has surpassed it this year in terms of growth.  In the process, Big Blue has also leapfrogged over Microsoft, the former IT industry's "king of market cap" for years.

In short, there is a change brewing at the top of the industry.  And it is a change back to the future.  The old king is back.  Which should put the IBM shareholders on Cloud 9 (right chart, also click to see IBM on Cloud 9 video - below).

And now, some background information...

How IBM Ascended to Cloud 9

Our Oct 2010 study of the Top 15 IT leaders' performance lead us to conclude that, at $139 per share, IBM was still grossly undervalued.  We thought it should be worth at least $176 at the time. 

This report caught the attention of BARRON's a couple of months later.  In a year-end story, the leading Wall Street magazine prophesized that IBM Shareholders Should Enjoy New Year.  By that time, the IBM share had moved to $147.

A few weeks later, in our year-end analysis of the Top 15 IT stocks, we updated our assessment of the relative value of IBM shares as follows:

"If IBM and Intel were priced in line with their peers' shares, their stock prices should be about $183 and $31 per share respectively," we said in January 11 Annex Bulletin (Consumer Rules).  "Instead, they are trading at $147 and $21 respectively.  That's about a 25% discount for the Big Blue share relative to its peers at the top of the industry pyramid."

Well, by mid-October, the market "heard us."  Big Blue stock set an all-time high of $190.53 on Oct 14 (left chart).  More importantly, IBM growth was accelerating. While Apple still remained atop the charts in terms of its absolute market cap value, Big Blue share rose faster this year (up 23% vs. Apple's 21%).  And both companies exceeded BY FAR (!) the Top 15 average increase in 2011 to-date of 3.8%., also leaving the Dow Jones in the dust in the process (see above charts).

So is this the end of the road for IBM?  Time to sell?  Not quite.  Not yet.  That depends on the market moves, of course, as high tide lifts most boats.  But our latest analysis of the top 15 IT companies' stock market and business performance shows that there is still some room for IBM shares to rise.  Not as much as before, of course, but still... here's the gist of it:

IBM closed today at $189.45, just under its all-time high.  Based on the current average P/E (price/earnings) ratio of the top 10 IT companies, sort of the Big Blue peers, we figure that a fair market price for IBM shares should be around $197 (per above summary chart).  If you click here, you can also see the details.

Market Performance

And now, here are the charts of the Top 15 companies' market cap, both in terms of change year-to-date, and in absolute terms:

IBM has now surpassed Microsoft, the long time market cap leader of  the industry.  Apple achieved that feat last year.  In fact, Apple had leaped over both Microsoft and Google in 2010, only to see its stock go through the roof despite the illness and the eventual passing of its legendary and visionary CEO - Steve Jobs. 

Apple has now not only surpassed all companies in terms of market cap, but is also leading the industry in terms of net profit.  In fact, Apple is now bigger than the veteran resurgent IBM in most important business measurements (revenues $108.3B vs. $106.5B, net profit $25.9B vs. $15.6B).

But in an unstated sign of deference to IBM's visionary status of in the industry, Apple has jumped on the Cloud bandwagon last June.  It was one of the last public moves that Apple's late CEO had made (above).

Meanwhile, it is also worthy of note that the largest company in the industry - HP - is actually in the cellar of market cap changes chart.  That's the price of the turmoil at the top and a schizophrenic behavior of its board (see Leo's Roar Scares Investors into Flight). 

After the Board ousted Leo Apotheker back in August whom they had picked for the job only nine months earlier, the incoming CEO, Meg Whitman, will probably need to jump through some incredibly high hoops in order to regain Wall Street's confidence. She failed to do that in the political arena three years ago (left) as had another former HP CEO, Carly Fiorina.  Well, that's one thing the two ladies have in common.  The way we see it, only a mass resignation by the HP Board may save the stock from further doom.

Meanwhile, there is one chart in which HP is still on top - in terms of its bulk.  HP continues to lead the industry in terms of its revenues.  Apple has now moved into the second spot, leapfrogging IBM.

Summary and Outlook

Wall Street deals in perceptions.  Perceptions are colored by emotions. Facts are only a crutch it sometimes uses to explain the inexplicable.  Emotions are by definition NOT rational. Yet here we are all trying to substitute reason for mass emotional reactions on Wall Street.

Well, with that as a preamble, P/E ratios are facts which try to explain Wall Street's perception of the companies' future earnings.  Based on our aggregate average P/E ratio for the top 15 global IT leaders, it would appear that Wall Street is bearish on the IT sector overall.  The current P/E ratio is down 17.5% since the start of 2011.  There are only two companies whose P/E ratio is up.  IBM is one.  Cisco is another.

So I guess that the bottom line perception on Wall Street of the top 15 IT companies.  Even though IBM shares have risen the most, investors seem to expect them to continue to rise, in line with earnings.  Maybe that's why the industry's most profitable company - Apple - is second to IBM in terms of market cap growth.

Oops... here I am, trying to use reason myself to explain emotions. :-)

Happy bargain hunting

Bob Djurdjevic

Special Belated Birthday Gift: "IBM on Cloud 9"

So with this "serious" analysis out of the way, we invite you to check out this lighthearted music video this author has just made re. "IBM on Cloud 9".  This, first-ever multi-media Annex Bulletin, is also a belated birthday gift for both IBM and Annex (IBM turned 100 in June, Annex turned 33 in May - see Happy Birthday, IBM! and Annex's 33rd Birthday, May 15, 2011).

IBM on Cloud 9 + Belated Happy Birthday - by Bob Djurdjevic (Dec 1)

(to both IBM - 100th and Annex - 33rd)

 

 

MARKET UPDATES: Annex Bulletins (Oct)

While traveling in Europe, which meant most of the month of October, we covered several market moves by email.  We reproduce those reports here as Annex Bulletins 2011-16 and 2011-17,  along with the charts that were published within them:

 

 

 

 

Or just click on SEARCH and use "company or topic name" keywords.

Volume XXVI, Annex Bulletin 2011-18
December 1, 2011

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

(c) Copyright 2011 by Annex Research, Inc. All rights reserved.
The copyright-protected information contained in the ANNEX BULLETINS is part of the Comprehensive Market Service (CMS).  Reproduction by any means is prohibited..

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Annex's 33rd Birthday (May 15, 2011)

 

Big Blue "Rock of Gibraltar" Stands (Analysis of IBM's first quarter business results)

 

Wall Street's New "Rock of Gibraltar" (Annual update to our 5-yr IBM forecast)

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HP: New Broom Sweeps Clean (Apotheker fills our first prescription in board shake-up)

IBM: Another Phoenix of the IT Industry , Analysis of IBM's 4Q10 result

One Man's Pain, Another Man's Gain? (Analysis of possible impact of Steve Jobs' health on IBM, Intel, other IT companies)

Consumer Rules (Analysis of top 15 global IT leaders' stock and business performances) 

IBM Hardware to Rise and Shine Again (Analysis of IBM STG business results and outlook)

BARRON's: IBM Shareholders Will Like New Year (Analysis of Barron's article on IBM stock)

 

HP's "Stealth CEO" Sounds Bullish in First Public Appearance (Analysis of HP's fourth quarter business results)

 

Silicon Valley Rodeo (Editorial on shenanigans and costly trivial pursuits)

 

IBM Business Up, Stock Down (Analysis of Big Blue's third quarter business results)