John Buckingham, a leading value-oriented money manager and editor of The Prudent Speculator, reiterates his buy recommendations on two leading tech stocks that declined in price in the wake of recent earnings reports.
Shares of International Business Machines (IBM) fell after the company released Q2 2022 results. The IT services concern earned an adjusted $2.31 per share, compared with the $2.29 consensus analyst estimate, and sales grew 16% year-over-year, excluding revenue from arrangements with its recently-spun-off Kyndryl.
IBM attributed the growth to strong performance in software and consulting, even as the impact of a strong dollar took 6%, or $900 million, off the company’s Q2 revenue print.
IBM cut its free cash flow guidance from a range between $10.0 billion and $10.5 billion to approximately $10 billion, disappointing analysts and traders, especially given the stock’s significant outperformance of other IT sector members this year. Management explained the whack was due to exogenous factors, including currency headwinds and an exit from Russia.
IBM’s forward P/E ratio has climbed near its 5-year high of 14 times, but analysts expect the company to earn nearly $12 per share in 2025, indicating that there’s more room for the stock to run before it might be considered fairly valued.
Of course, every stock is fighting for a position in our portfolios and this year’s drop has resulted in new discounts across our opportunity set, while IBM shares have held up very well to date. Our Target Price for IBM, which yields 5.1%, is now $161.
Shares of Seagate Technology PLC (STX) plunged after the storage maker reported fiscal Q4 results that trailed analyst estimates, while soft Q1 guidance and production cuts sent the stock and that of its peers further into negative territory for the year.
In Q4, STX earned $1.59 per share (vs. $1.91 est.) and had revenue of $2.63 billion (vs. $2.80 billion est.). Management explained the shortfall was the result of COVID lockdowns in Asia, non-HDD component shortages and global inflation. Next quarter, STX expects adjusted EPS around $1.40 (vs. $2.27 est.) and revenue of $2.50 billion (vs. $3.01 billion est.).
Fiscal Q1 guidance coming in well below analyst estimates is sure to disappoint many and led to a rash of analyst downgrades. We suspect EPS and sales targets will get whacked as well, while Q2 and beyond will get less bullish estimates as well.
Prior to the announcement, analysts were expecting EPS growth between 6% and 10% for the next three fiscal years, ahead of the 1% to 4% range for expected sales (the gap likely due to STX’s aggressive share buyback program).
Shares are down by more than 30% this year, even as the valuation is exceptionally reasonable, and the longer-term dynamics of the storage business remain robust.
Of course, storage has historically been a very volatile industry, with booms, busts and M&A volume. Yet, in the recent past, STX and its competitors have moved towards a storage commodity model with more stable revenue and growing earnings power driven by volume.
COVID impacts seem likely to upset the supply chain a while longer, but we are content with our present positioning. The company remains very profitable and the dividend yield is now 3.6%. Our Target Price is now $119.
