Why IBM Stock Gained 20% in 2016

By Timothy Green Markets Fool.com

Image source: IBM.

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What happened

Shares of International Business Machines (NYSE: IBM) rose 20.6% in 2016, according to data provided fromS&P Global Market Intelligence. While IBM's revenue and profit slumped throughout the year, the company beat analyst estimates for both revenue and earnings every quarter, driven in part by the continued rapid growth of its strategic imperatives. A strong fourth-quarter report in January 2017 drove the stock even higher. Shares of IBM are up an additional 5.5% year to date.

So what

IBM drew a line in the sand at the beginning of 2016, proclaiming that it would generate at least $13.50 in adjusted EPS for the year. It was a messy year, with one-time tax items, restructuring costs, and IP licensing income muddling the numbers. But each and every quarter, IBM performed better than analysts expected. Revenue declines moderated as currency became less of an issue, and the software business returned to growth during the second quarter.

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IBM data by YCharts.

IBM's strategic imperatives continued to grow quickly despite surpassing trailing-12-month revenue of $30 billion. The cloud business continued to grow fast as well, with cloud delivered-as-a-service on a $7.5 billion annual revenue run rate at the end of the third quarter, up 66% year over year. The deep pessimism that drove down the stock price in 2014 and 2015 dissipated. While the market still prices IBM at a low double-digit multiple of earnings, the stock isn't nearly as cheap as it was at the beginning of 2016.

Now what

IBM surpassed its full-year guidance when it reported its fourth-quarter results in January, generating $13.59 in adjusted EPS. What's more, the company expects to grow adjusted EPS to at least $13.80 this year, despite tax headwinds. The turning point in the company's transformation has finally been reached, and a return to revenue growth shouldn't be far behind.

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Timothy Green owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.