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IBM: Unjustly Unloved

Peter Wahlstrom, CFA

Pete Wahlstrom: IBM (IBM) is a wide-moat stock that just about everyone has heard of. But with shares flat over the last three years and down 13% in the last two months, no one really likes it. Our wide-moat view stems from the firm's switching costs and intangible assets.

IBM has very solid and sticky infrastructure-management software that customers are reluctant to switch from. In short, IT personnel use IBM software for critical database operations and data-center operations. And they'd rather stick with IBM versus switch to a less familiar company or name. Combine this with IBM's army of consultants--who advise clients on software, hardware, and other strategic decisions--and this formula has worked out well.

There are a couple of headwinds, though. IBM has a lagging IT-services business, and [they are] facing pressure from a shift to the cloud. While we believe that management is making the right strategic decisions, IBM is still in the early stages of its turnaround. The company still benefits from a wide economic moat, and we view shares as fundamentally undervalued, trading at about a 15% discount to our fair value estimate and in 4-star territory.