IBM Indicates Turnaround Through Series Of Acquisitions
After hitting a high of $215.90 in March 2013, the shares of International Business Machines Corporation (IBM) touched a low of $116.90 in February, 2016. For the past few years, the company faced severe growth challenges, thereby resulting in a decline in revenue from $106.9 billion in fiscal 2011 to $83.8 billion in the fiscal 2015.
The company’s debt to equity ratio has increased from 0.48 in 2006 to 2.34 in fiscal 2015. Similarly, the financial leverage has increased from 3.62 in 2006 to 7.75 in fiscal 2015. Thus, it looks as if the company is deteriorating. However, a careful assessment of the future plans will reveal a different picture.
The operating margin of the company has in fact increased from 13% in 2006 to 19.2% in 2015. Thus, in the past decade, earnings per share have more than doubled to $13.42 in fiscal 2015. The annual dividend per share has increased from a mere $1.10 in 2006 to $5.0 in the fiscal 2015. The long-term debt of the company currently stands at $33.42 billion. However, considering the fact that the company generates free cash flow of about $13 billion, the debt can be easily serviced. The company’s interest coverage ratio is 35. Thus, IBM will not have any issue in managing its interest obligation even if the EBIT (earnings before interest and taxes) declines to half of the current level.
The company continues to take wise business decisions. In fiscal 2015, IBM acquired 14 companies. The trend continues in fiscal 2016 as well. So far, in the past two months, the company has acquired five companies, which includes Ecx.io, Aperto and Ammirati.
Ecx.io, a German design and creative services agency, is expected to become a part of design division (Interactive Experience or iX) of IBM. On the other hand, the German company Aperto is an online advertising agency. The acquisition of Ammirati is the first of its kind in the digital marketing agency segment.
The acquisitions mentioned above focus mainly on strategic imperatives, which refer to the company’s initiatives in mobile, security, social, analytics and cloud technologies.
For the fourth-quarter of fiscal 2015, the strategic imperatives recorded revenue of $28.9 billion, up 24% from the prior year similar period. The US and China account for 62% of mobile advertisement spending in the world. The advertisement spending in digital format is expected to cross $82 billion in 2018.
In addition to the acquisitions, IBM also has entered into a strategic partnership with Facebook (FB) to create better marketing solutions to enhance its ad targeting. Thus, considering the above factors, we can safely argue that an investor should only look for buying opportunities at every dip.
Technically, as shown in the image below, the counter has major support at 132. Major resistance exists at 165 levels. The resistance also coincides with the 61.8% Fibonacci retracement of the decline from a high of 198 to a low of about 115.
The stock has also formed a bullish harmonic shark pattern. Thus, a binary options trader should purchase a call option with March end expiry. The suggested strike price for the call option is 160.