There's no denying it: This year's been a pretty lousy one for the market. The S&P 500 (^GSPC -2.37%) is down 23% year to date, and is sitting within easy reach of a new 52-week low. Blame the rout suffered by several key technology stocks, mostly, paving the way for most other equities.

There's a curious exception to this market-wide and tech sector weakness that's worth noting. IBM (IBM -1.44%) is holding up surprisingly well in the otherwise miserable environment. And it's arguably doing so for all the right reasons despite the specter of a recession. Here are the top three reasons.

1. Diversified business lines that are perpetually in demand

If the economy sours enough, it will take a toll on all businesses, with corporations being forced into extreme austerity. That's a worst-case scenario that doesn't seem a likely threat to IBM, though.

The company might not be positioned for significant growth, but it is positioned to generate revenue in almost any economic environment. Around one-third of its revenue stems from consulting work, while more than one-third comes from software sales. 

These aren't your typical consulting and software businesses, however. Much of it is contractual, meaning its client companies have pre-arranged access to employees or software for a specified period of time. Its annualized recurring software revenue, for example, now stands at $12.9 billion, making up roughly half of its current yearly software sales. Moreover, its software includes cybersecurity, data analysis, artificial intelligence, hybrid cloud computing, and transaction processing. These are service-based software suites that most of its customers rely on in a big way.

The kicker: CFO James Kavanaugh said a couple of years ago, "[For every $1 worth of business on a hybrid cloud platform], another $3 to $5 is
spent on software and another $6 to $8 on the cloud services." In other words, sales of hardware drive long-term software and consulting revenue, yet IBM's unique software and consulting offerings also drive hardware sales. It's a self-powering virtuous cycle.

IBM's solutions aren't something major enterprises can easily replace or simply stop using. In fact, the company argues that technology becomes an even more important growth driver when stagflation stifles traditional growth efforts.

2. IBM is making smart business-building acquisitions

Many companies make acquisitions to increase their revenue without much thought about where or how they fit in. But IBM's deals are made with purpose rather than rooted in status and stature. For instance, in July, the company announced its purchase of Databand.ai, adding the ability to spot errant digital data to the company's data-management arm. Earlier this year, it bought Neudesic, which operates a hybrid cloud consulting business specializing in Microsoft's Azure cloud platform.

None of the six deals the company has made this year have been particularly high-profile acquisitions. Neither have any of the other 20-plus acquisitions CEO Arvind Krishna has directed since taking the helm from Ginni Rometty in early 2020. IBM hasn't made any large-scale deals since buying Red Hat in 2019, in fact. But the smaller companies it's scooping up make its products more marketable.

While the exact acquisitions have been relatively small, analysts at Evercore ISI (EVR -1.98%) suggest IBM could be mulling an acquisition worth as much as $30 billion, potentially pushing the company into an all-new line of business that creates synergy with its existing ones.

3. A little something is better than a lot of nothing

Lastly, IBM might never dish out enormous organic growth again, but it offers something even more valuable to investors amid economic weakness: a healthy dividend. It currently yields 5.2%, and given the consistent recurring revenue of much of its business as well as how well its payouts are covered, there's no reason to fear this dividend is in jeopardy.

Investors in tune with the company's fiscals might not completely agree. Last fiscal year, IBM dished out $6.55 per share in dividends, but the company only earned $6.41 per share. That's clearly not sustainable.

But it was a year complicated by COVID-19 and more corporate restructuring. In November, IBM completed the spinoff of its managed infrastructure business now called Kyndryl (KD -4.86%). While spinoffs don't technically incur direct operational costs, they can often take an indirect toll on a company's focus and ability to adapt to changing market conditions. IBM hasn't exactly escaped inflationary pressures and the fallout from broken supply chains, either.

Regardless, the company's bottom line is growing again. Analysts collectively expect per-share earnings of $9.34 this year, followed by an improvement to $10.05 next year. That's far more than enough to continue funding the dividend and extend its 27-year streak of annual dividend growth.

Dividends may not be your thing. Amid economic uncertainty, though, collecting good income becomes a pretty big deal.

IBM (IBM) was upgraded Friday by TheStreet's Quant Ratings service. Long-time Real Money subscribers have come to learn I like to combine investment approaches. No one investment approach (fundamental, technical, quantitative) is perfect and better results can come from blending or combining different methods.

Let's see what could Excellerate the charts of IBM keeping in mind this quantitative upgrade.

In the daily bar chart of IBM, below, we can see that the shares have moved in a broad sideways trend the past 12 months. The 200-day moving average line has slowly moved up and then down in what could be considered a neutral band.

The On-Balance-Volume (OBV) line has also moved sideways suggesting a balance between buyers and sellers. The Moving Average Convergence Divergence (MACD) oscillator is currently in a bearish alignment below the zero line but the trend of the past year has been sideways.

In the weekly Japanese candlestick chart of IBM, below, we can see a broad sideways trend to trading the past 18 months or so. Trading volume has slowed in the past few months and the weekly OBV line shows a decline from February. So far prices have held relatively steady but that may not continue if weakness in the broader market averages continues.

The MACD oscillator is slightly above the zero line and looks like it will cross the line in the near future.

In this daily Point and Figure chart of IBM, below, we can see a possible downside price target in the $109 area. A trade at $122.47 is needed to refresh the downtrend.

In this second Point and Figure chart of IBM, below, we used weekly price data. Here a price target of $108 is shown.

Bottom-line strategy: IBM could continue to trade in a broad sideways pattern but further weakness cannot be ruled out as weak market conditions can mean that traders sell first and ask questions later.

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By The Valuentum Team

International Business Machines Corporation (NYSE:IBM) has become a fundamentally different business in the past few years, one focused on providing hybrid cloud computing offerings. The company is a stellar free cash flow generator which enables IBM to reward investors via generous dividend increases, with shares of IBM yielding ~5.1% as of this writing. Substantial near-term headwinds remain, largely due to the various exogenous shocks seen of late (such as major inflationary pressures, rising interest rates, supply chain hurdles, and raging geopolitical tensions), though IBM is still worth considering as a high-yielding income generation idea.

IBM's Key Investment Considerations

IBM solves business problems via integrated hardware/software solutions that leverage IT and its knowledge of business processes. Its solutions help reduce a client's costs or enable new capabilities that generate revenue. The company was founded in 1924 and is headquartered in New York.

Back in 2019, IBM bought Red Hat (a top provider of open source cloud software) through a ~$34 billion deal which made IBM a contending hybrid cloud provider. IBM is looking to seize what it describes as a ~$1 trillion hybrid cloud opportunity, and exact growth in this area has been encouraging. IBM's revamped management team is working hard to turn things around after the company made various blunders during the 2010s decade. Its current Chairman and CEO, Arvind Krishna, has done a solid job righting the ship at IBM since taking on the top role in 2020.

In November 2021, IBM spun off its legacy business tax-free to shareholders as a new publicly traded entity, Kyndryl Holdings, Inc. (KD). Initially, IBM retained a 19.9% stake in Kyndryl though the firm intends to exit that position within 12 months of the spinoff.

Earnings Update

On July 18, IBM reported earnings for the second quarter of 2022 that beat both consensus top- and bottom-line estimates. Its GAAP revenues rose by 9% year-over-year to hit $15.5 billion with strong growth at its Red Hat, various consulting services, and hybrid infrastructure offerings being key here. When removing foreign currency headwinds arising from the strong US dollar seen of late from the picture, IBM's non-GAAP constant currency revenues were up 16% year-over-year last quarter. IBM's portfolio optimization efforts are having a very powerful impact on its financial performance.

The firm's GAAP gross margin fell by ~185 basis points year-over-year last quarter, falling down to 55.4%. However, economies of scale helped drive its GAAP income from continuing operations up by 81% year-over-year in the second quarter, rising to $1.5 billion. There is some noise here due to the separation of IBM's legacy businesses (via the spinoff of Kyndryl) from its core operations. Keeping that noise in mind, IBM's underlying operations have performed quite well of late.

During its second quarter earnings call, IBM's management team noted the firm now forecasted that its full-year free cash flows would come in near $10.0 billion in 2022, at the low end of its previous forecast. IBM generated $3.6 billion in free cash flow (defined as net operating cash flow less 'payments for property, plant, and equipment' and 'investment in software') while spending $3.0 billion covering its dividend obligations during the first half of 2022. Its modest share repurchases during this period were related to tax withholding purposes as the new IBM is focused on retaining cash to invest in the business. We appreciate that IBM's dividend obligations remain well-covered by its traditional free cash flows.

The company exited June 2022 with a net debt load of $42.8 billion (inclusive of short-term debt, exclusive of restricted cash). One of the biggest risks to IBM's dividend is its large net debt load. IBM had $7.6 billion in cash, cash equivalents, and current marketable securities on hand at the end of June 2022 which provides the company with ample liquidity to meet its near-term funding needs.

IBM continues to expect that its constant currency revenues will grow decently this year (in the mid-single digit range), though sustained foreign currency headwinds are expected to offset strong demand for its offerings, to a degree. Over the long haul, we forecast that under its new management team, IBM will return to stable revenue growth which in turn should see the company's free cash flows swell higher. That would allow IBM to boost its dividend in a sustainable manner going forward, though we caution that its net debt load could limit the size of any future payout increases.

Dividend Analysis

The Dividend Cushion Ratio Deconstruction, shown in the image up above, reveals the numerator and denominator of the Dividend Cushion ratio. At the core, the larger the numerator, or the healthier a company's balance sheet and future free cash flow generation, relative to the denominator, or a company's cash dividend obligations, the more durable the dividend.

The Dividend Cushion Ratio Deconstruction image puts sources of free cash in the context of financial obligations next to expected cash dividend payments over the next 5 years on a side-by-side comparison. Because the Dividend Cushion ratio and many of its components are forward-looking, our dividend evaluation may change upon subsequent updates as future forecasts are altered to reflect new information.

In the context of the Dividend Cushion ratio, IBM's numerator is smaller than its denominator, which suggests weak forward-looking dividend coverage. However, given IBM's strong and stable cash flow profile, we view its forward-looking dividend coverage favorably when considering IBM's ability to tap capital markets into account. Should IBM stumble for any reason, its ability to make good on its payout may be in danger.

IBM's Economic Profit Analysis

The best measure of a firm's ability to create value for shareholders is expressed by comparing its return on invested capital ['ROIC'] with its weighted average cost of capital ['WACC']. The gap or difference between ROIC and WACC is called the firm's economic profit spread. IBM's 3-year historical return on invested capital (without goodwill) is 41.6%, which is above the estimate of its cost of capital of 9.2%.

In the chart down below, we show the probable path of ROIC in the years ahead based on the estimated volatility of key drivers behind the measure. The solid grey line reflects the most likely outcome, in our opinion, and represents the scenario that results in our fair value estimate. Assuming IBM's exact portfolio optimization efforts go as planned, the firm's ability to generate shareholder value (which historically has been impressive) should continue to improve.

IBM's Cash Flow Valuation Analysis

Our discounted cash flow process values each firm on the basis of the present value of all future free cash flows, net of balance sheet considerations. We think IBM is worth $136 per share with a fair value range of $101-$171 per share. Shares of IBM are trading moderately below our fair value estimate as of this writing.

The near-term operating forecasts used in our enterprise cash flow model, including revenue and earnings, do not differ much from consensus estimates or management guidance. Our model reflects a compound annual revenue growth rate of 3.4% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of -10.3%.

Our model reflects a 5-year projected average operating margin of 17.6%, which is above IBM's trailing 3-year average. Beyond Year 5, we assume free cash flow will grow at an annual rate of 2% for the next 15 years and 3% in perpetuity. For IBM, we use a 9.2% weighted average cost of capital to discount future free cash flows.

IBM's Margin of Safety Analysis

Although we estimate IBM's fair value at about $136 per share, every company has a range of probable fair values that's created by the uncertainty of key valuation drivers (like future revenue or earnings, for example). After all, if the future were known with certainty, we wouldn't see much volatility in the markets as stocks would trade precisely at their known fair values.

In the graphic up above, we show this probable range of fair values for IBM. We think the firm is attractive below $101 per share (the green line), but quite expensive above $171 per share (the red line). The prices that fall along the yellow line, which includes our fair value estimate, represent a reasonable valuation for the firm, in our opinion.

Concluding Thoughts

The steady decline in IBM's legacy business since 2010 represents a major reason why the firm spun off Kyndryl in November 2021. Going forward, IBM will need to prove that as a leaner and more focused enterprise, it can maintain solid revenue and operating income growth over the long haul. We think that will be the case, though substantial near-term headwinds remain. Investors looking for an income generation idea backed up by a strong cash flow profile should take a closer look at IBM.

A four-year bachelor’s degree has long been the first rung to climbing America’s corporate ladder.

But the move to prioritize skills over a college education is sweeping through some of America’s largest companies, including Google, EY, Microsoft, and Apple. Strong proponents say the shift helps circumvent a needless barrier to workplace diversity.

“I really do believe an inclusive diverse workforce is better for your company, it’s good for the business,” Ginni Rometty, former IBM CEO, told Fortune Media CEO Alan Murray during a panel last month for Connect, Fortune’s executive education community. “That’s not just altruistic.”

Under Rometty’s leadership in 2016, tech giant IBM coined the term “new collar jobs” in reference to roles that require a specific set of skills rather than a four-year degree. It’s a personal commitment for Rometty, one that hits close to home for the 40-year IBM veteran.

When Rometty was 16, her father left the family, leaving her mother, who’d never worked outside the home, suddenly in the position to provide.

“She had four children and nothing past high school, and she had to get a job to…get us out of this downward spiral,” Rometty recalled to Murray. “What I saw in that was that my mother had aptitude; she wasn’t dumb, she just didn’t have access, and that forever stayed in my mind.”

When Rometty became CEO in 2012 following the Great Recession, the U.S. unemployment rate hovered around 8%. Despite the influx of applicants, she struggled to find employees who were trained in the particular cybersecurity area she was looking for.

“I realized I couldn’t hire them, so I had to start building them,” she said.

In 2011, IBM launched a corporate social responsibility effort called the Pathways in Technology Early College High School (P-TECH) in Brooklyn. It’s since expanded to 11 states in the U.S. and 28 countries.

Through P-TECH, Rometty visited “a very poor high school in a bad neighborhood” that received the company’s support, as well as a community college where IBM was offering help with a technology-based curriculum and internships.

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“Voilà! These kids could do the work. I didn’t have [applicants with] college degrees, so I learned that propensity to learn is way more important than just having a degree,” Rometty said.

Realizing the students were fully capable of the tasks that IBM needed moved Rometty to return to the drawing board when it came to IBM’s own application process and whom it was reaching. She said that at the time, 95% of job openings at IBM required a four-year degree. As of January 2021, less than half do, and the company is continuously reevaluating its roles.

For the jobs that now no longer require degrees and instead rely on skills and willingness to learn, IBM had always hired Ph.D. holders from the very best Ivy League schools, Rometty told Murray. But data shows that the degree-less hires for the same jobs performed just as well. “They were more loyal, higher retention, and many went on to get college degrees,” she said.

Rometty has since become cochair of OneTen, a civic organization committed to hiring, promoting, and advancing 1 million Black individuals without four-year degrees within the next 10 years.

If college degrees no longer become compulsory for white-collar jobs, many other qualifications—skills that couldn’t be easily taught in a boot camp, apprenticeship program, or in the first month on the job—could die off, too, University of Virginia Darden School of Business professor Sean Martin told Fortune last year.

“The companies themselves miss out on people that research suggests…might be less entitled, more culturally savvy, more desirous of being there,” Martin said. Rather than pedigree, he added, hiring managers should look for motivation.

That’s certainly the case at IBM. Once the company widened its scope, Rometty said, the propensity to learn quickly became more of an important hiring factor than just a degree.

This story was originally featured on Fortune.com

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IBM (IBM) closed at $127.73 in the latest trading session, marking a +0.36% move from the prior day. This move lagged the S&P 500's daily gain of 0.69%. At the same time, the Dow added 0.64%, and the tech-heavy Nasdaq lost 0.2%.

Coming into today, shares of the technology and consulting company had lost 8.02% in the past month. In that same time, the Computer and Technology sector lost 14.62%, while the S&P 500 lost 9.94%.

Investors will be hoping for strength from IBM as it approaches its next earnings release. On that day, IBM is projected to report earnings of $1.88 per share, which would represent a year-over-year decline of 25.4%. Meanwhile, our latest consensus estimate is calling for revenue of $13.75 billion, down 21.96% from the prior-year quarter.

Looking at the full year, our Zacks Consensus Estimates suggest analysts are expecting earnings of $9.39 per share and revenue of $59.9 billion. These totals would mark changes of +18.41% and -15.38%, respectively, from last year.

Investors might also notice exact changes to analyst estimates for IBM. These revisions typically reflect the latest short-term business trends, which can change frequently. As such, positive estimate revisions reflect analyst optimism about the company's business and profitability.

Our research shows that these estimate changes are directly correlated with near-term stock prices. To benefit from this, we have developed the Zacks Rank, a proprietary model which takes these estimate changes into account and provides an actionable rating system.

The Zacks Rank system, which ranges from #1 (Strong Buy) to #5 (Strong Sell), has an impressive outside-audited track record of outperformance, with #1 stocks generating an average annual return of +25% since 1988. Over the past month, the Zacks Consensus EPS estimate has moved 0.88% lower. IBM is currently a Zacks Rank #3 (Hold).

Digging into valuation, IBM currently has a Forward P/E ratio of 13.56. This represents a no noticeable deviation compared to its industry's average Forward P/E of 13.56.

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Meanwhile, IBM's PEG ratio is currently 1.94. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. Computer - Integrated Systems stocks are, on average, holding a PEG ratio of 1.77 based on yesterday's closing prices.

The Computer - Integrated Systems industry is part of the Computer and Technology sector. This group has a Zacks Industry Rank of 162, putting it in the bottom 36% of all 250+ industries.

The Zacks Industry Rank gauges the strength of our individual industry groups by measuring the average Zacks Rank of the individual stocks within the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.

To follow IBM in the coming trading sessions, be sure to utilize Zacks.com.

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