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

INDUSTRY TRENDS

Updated 1/18/11, 12:11AM PST

Analysis of Possible Impact of Steve Jobs News on IBM, Intel, Other IT Stocks

One Man's Pain, Another Man's Gain?

Will Undervalued IT Stocks, Like IBM and Intel, Benefit from Steve Jobs' Personal Health Misfortune?

HAIKU, Maui, Jan 18 – Life isn't always fair.   When misfortune strikes, most people feel empathy for the victim.  Some rush to help.  That's real life on Main Street.  But not on Wall Street.  In capital markets, "one man's pain is often another man's gain." 

You may see an example of that when the markets open Tuesday morning after a long weekend in the U.S.  Undervalued IT companies, such as IBM and Intel, for example, may see influx of new capital as investors move out of the IT industry's most valuable stock - Apple. 

Why?  Because Apple disclosed on Monday that its co-founder and CEO, Steve Jobs, is once again taking a medical leave. (see Steve Jobs' medical leave rattles Apple, Silicon Valley, Jan 17).  Six years ago, he had pancreatic cancer surgery.  Two years ago, he had a liver transplant.  Jobs is only 55, though illnesses have taken their toll on his looks.  Even before today's announcement, he looked gaunt, almost emaciated (above).

Apple is 35.  It is a ripe old age for a computer company.  Others might have showed their age by slowing innovation and growth.  Not Apple.  Like a Phoenix (bird) rising from the ashes, Steve Jobs' Apple is bursting at the seams.  At $321 billion current market cap, it is the world's most valuable IT company.   It trails only Exxon ($389 billion) among all global giants.  But unlike Exxon's CEO (I have no idea who it is... do you?), Jobs is almost synonymous with Apple in most people's minds.  As goes Jobs, so goes Apple, many investors may reason.   So when something happens to Jobs, it also happens to Apple.  And to its stock.

In Europe, the Apple shares took an 8% dive on Monday.  The U.S. markets were closed due to the Martin Luther King day.  Eight percent is a lot of money in Apple's case.  If that kind of a selloff were to happen on Tuesday morning, the almost $26 billion of capital will be looking for a new home.  Which is why we think that the most undervalued stocks among the IT leaders may be beneficiaries of Apple's and Jobs' misfortune (see Consumer Rules, Jan 11).

If IBM and Intel were priced in line with their peers' shares, their stock prices should be about $183 and $31 per share respectively.  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.  And Intel's are even more of a bargain - available at 48% off the "list price" (meaning at the average P/E ratio of the top 8 leaders).

(An excerpt from Consumer Rules, Jan 11)

Last week, Intel blew the lid off Wall Street forecast with solid fourth quarter and excellent full-year results.  Yet its stock sagged in next day's trading, after rising about three points in after-hours trading immediately following the announcement.  It seemed as if powerful interests on Wall Street were betting against this leading chip-maker no matter how good its business performance.  Big Blue could relate to that, we suspect.  How many times in the last five years did IBM deliver excellent quarterly results only to be met with a shrug on Wall Street?

That may change tomorrow morning, after the market absorbs the Steve Jobs news.  If IBM were to report strong fourth quarter results, which are due after the markets close on Tuesday, the new/old IT bellwether stock may give the whole market a boost, and not just its IT peers.  Anticipating good news from IBM, the market has already pushed the stock up in recent days to al all-time high of $150 per share.

As good as that looks, still no cigar for Big Blue.  The IBM stock has a long way to go before catching up with its top peer valuations.  As you saw in our last week's report, we put the current "fair" market valuation at $183 per share, using the average P/E ratio of top 8 global IT leaders (see Consumer Rules, Jan 11).

Apple Soars Like Phoenix Rising from Ashes

Meanwhile, Apple's earnings skyrocketed 194% on a 128% jump in revenues, in 2010 while Google's soared 81%. As a result, Apple is now bigger than Microsoft, both in revenues and equity, not just market cap (right).  A major change at the top.  An industry upstart from the 1980s is now a veteran laggard.   Apple has also virtually caught up with IBM in terms of earnings (right).  Another IT industry milestone.

Ironically, Apple is industry upstart from the 1970s.  And it is again a highflyer of the 2010s.  Maybe Apple should change its name to Phoenix? :-) [rising from ashes].

Which goes to show us that the current laggards should not despair.  Even some old-time highflyers from the 1950s and 1960s, like IBM, have a chance of regaining the leadership.  All it takes is the courage to change and innovate.  And believe in oneself.  Steve Jobs of Apple a.k.a. Phoenix wrote a book on how that can be done over and over again. 

But with Jobs gone from the helm, at least for a while, "one man's pain, another man's gain" may be the sad new reality show Wall Street.   We'll see if that's how the market plays it in the next few days.

Meanwhile, we wish Steve Jobs good luck and a good outcome of his latest medical challenge.

Happy bargain hunting

Bob Djurdjevic

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