IBM Proves It Is Not Too Big To Grow

9/28/2009


  Recent Price
$122
  Dividend
$2.20
  Yield

1.8%

  P/E Ratio
13
  Shares (millions)
1,337
  Long-Term Debt as % of Capital
57%
  52-Week Price Range
$122.88 - $69.50

IBM’s ($122; IBM) per-share profits have risen an average of 15% in the past four quarters despite an average revenue decline of 7%. To cope with the falling sales, IBM has taken aggressive cost-cutting measures. With revenue growth likely to resume in 2010, the computer giant is well positioned to sustain brisk profit growth.

Revenue shrinkage has not left IBM short on cash. The company holds $12.53 billion, or $9.55 per share, up 27% from year-ago levels on the strength of growth in operating and free cash flow. IBM is a Focus List Buy and a Long-Term Buy.

Smart growth

IBM seeks new ways to serve key markets in computer hardware (16% of sales in the six months ended June), software (22%), and services (59%).

IBM has proposed building microchips patterned after DNA and marketing television remotes that connect to Facebook. It dabbles in nanotechnology in Bulgaria and is working on software to store astronomical data from a new super telescope expected to generate more information in its first hour of operation than is currently available on the Internet. IBM received 4,186 patents last year, its 16th consecutive year leading the country in that statistic. Not all patents lead to profits, but IBM has found ways to make many of its inventions pay off.

IBM is putting its expertise in data analysis to work for many public-infrastructure projects, which could open up new revenue streams as demand for urban planning increases in such emerging markets as China, India, and Brazil. For a “smart city” project in China, IBM will analyze data to help improve water-treatment systems. IBM also aims to capture a portion of the U.S. stimulus spending on health-care and energy infrastructure through software that allows businesses to store data on other people’s computers.

IBM avoids Sun burn

Wary of the antitrust review and concerned about costs, IBM withdrew a $7 billion offer for Sun Microsystems ($9; JAVA) in April. But IBM has since managed to capture some of Sun’s market share without the expense or regulatory hassles.

A lengthy regulatory review has hindered Oracle’s ($21; ORCL) proposed $7.4 billion takeover of Sun. That uncertainty hanging over Sun’s hardware business has helped rivals poach jittery clients. IBM says it snatched up more than 250 former Sun customers in the first six months of 2009, with defections accelerating since the merger announcement.

Conclusion

During earnings season, IBM rarely misfires. It has grown per-share profits for 21 consecutive quarters and hasn’t fallen short of the consensus since the March 2005 period. In addition, the stock price has not declined on a quarterly profit release since the September 2007 quarter.

In August, IBM reaffirmed its 2009 per-share-profit target of at least $9.70 and expectations of $10 to $11 next year. Wall Street anticipates 10% growth this year and next year. The market expects 3% sales growth in 2010 in the wake of a 9% decline in 2009.

At 13 times trailing earnings, IBM is cheaper than rivals Dell ($16; DELL) and Apple ($184; AAPL) and trades 10% below its three-year average P/E of 14. An annual report for International Business Machines Corp. is available at New Orchard Road, Armonk, NY 10504; (914) 499-1900;
www.ibm.com.

IBM
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $2.32 vs. $1.97 - 13% $110.64 -

$95.70

12 - 11
Mar '09 1.70 vs. 1.65 - 11% 99.86 - 81.76 11 - 9
Dec '08 3.28 vs. 2.80 - 6% 116.80 - 69.50 14 - 8
Sep '08 2.05 vs.

1.68

+ 5% 130.93 - 109.95 16 - 14
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $103.63 $8.93 $1.90 $130.93
-
$69.50 15 - 8
2007 $98.79 $7.18 $1.50 121.46
-
88.77 17 - 12
2006 $91.42 $6.06 $1.10 97.88
-
72.73 16 - 12
2005 $91.13 $5.22 $0.78 99.10
-
71.85 19 - 14
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
89 51 79 94 79 66 44

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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