While the stock market may have taken some comfort in the passage by the U.S. House of Representatives of the government's financial rescue plan on Oct. 3, investors remain nervous. They have been looking to recalibrate their portfolios with higher-quality investments as markets continue to be besieged not only by concerns about the spiraling financial crisis but by a looming global recession as well. In the search for solid stocks, stalwarts like IBM (IBM) stand out in troubled times.
IBM itself got pummeled in recent days, in part because of concern the crisis might hurt sales and earnings. IBM tumbled on Oct. 2 to 104 a share from 110 the previous day. On Oct. 3 the stock rebounded early in the day but closed at 103.44. Any negative consequences from events won't be immediate, although some analysts argue that the consolidation in the financial services industry may even benefit Big Blue.
Merger activity has certainly been heated, amid deals like Bank of America's (BAC) rushed acquisition of Merrill Lynch (MER) and the Citigroup (C)-Wells Fargo (WFC) contest for Wachovia (WB). "Even though many of the mergers may be shotgun marriages, these would still require integration of systems," says Amitabh Goel, tech analyst at investment firm First Global Markets. That would bring in more business for IBM. "We are closely monitoring the impact of the financial turmoil on IBM's business," says Goel, and the firm maintains a "moderate outperform" rating on IBM, he says. Some 30% of IBM's revenues comes from the financial services industry. "A major portion of this revenue is recurring in nature," notes Goel.
"defensive characteristics"
Some IBM bulls argue that any drop in the stock's price makes it an even more attractive buy. And analysts continue to favor it. As of Oct. 2, 16 of the 24 analysts who follow IBM still rate it as a buy and just one recommends selling, according to data from Bloomberg. Six rate it a hold.
A.M. Sacchonaghi Jr., technology analyst at investment firm Sanford C. Bernstein (it has done banking for IBM), is bullish on IBM partly because of its high level of recurring revenues and profitability, broad geographic dispersion, and below-market valuation. He rates the stock overweight, with a price target of 134 a share. "Our preference for stocks with more defensive characteristics is supported by the observation that IBM has historically outperformed both the tech universe (by an average of 30%) and the broader market (by 5%)," he says. The stock has outperformed the S&P 500 index year-to-date, but it continues to trade below the market's price-earnings multiple, notes the analyst, "thus mitigating the risk" of a reduction in IBM's p-e multiple.