IBM Profits Grow Through Recession

4/19/2010


  Recent Price
$129
  Dividend
$2.20
  Yield

1.7%

  P/E Ratio
13
  Shares (millions)
1,341
  Long-Term Debt as % of Capital
49%
  52-Week Price Range
$134.25 - $96.44

Consistency, thy name is IBM ($129; IBM). Per-share profits have risen at least 12% in each of the last four years, powered by modest sales growth, a 16% decline in share count, and a steady increase in profit margins.

Years of divestitures, expansion into new markets, and productivity initiatives have left IBM leaner and tougher — and nimbler than many expect from a company projected to generate nearly $100 billion in revenue this year. IBM, positioned for continued double-digit growth in per-share profits over the next few years, is a Focus List Buy and a Long-Term Buy.

Broad reach

IBM’s services unit (53% of 2009 sales, 42% of pretax profits), the world’s largest provider of technology services, provides computer-infrastructure and outsourcing services. The software unit (25%, 42%) sells mostly middleware and operating systems, programs used to operate corporate computer networks. About two-thirds of software revenue is recurring, stemming from licensing agreements, subscriptions, and support for existing clients.

Systems and technology (18%, 7%) provides server computers used to run businesses, as well as data-storage products. The unit generates more than 50% of its revenue through a global network of marketing partners. IBM is the world’s largest seller of servers, according to research firm IDC, with 33% of the market in 2009 as measured by revenue. In February, IBM introduced the Power 7 microchip, which should help boost IBM’s share of the market for Unix servers. The company also operates its own financing unit (4%, 9%).

Stronger than ever

IBM’s broad business mix helped it thrive despite the global recession. Gone is the cyclical behemoth best known for its hardware — IBM sold its low-margin personal-computer business in 2005 and its printer business in 2007. Over the last five years, IBM raised its gross profit margin to 50.6% from 41.5%.

During that five-year period, per-share profits and free cash flow almost doubled, and the dividend tripled. IBM has shared much of its cash flow with investors, spending a net $42.92 billion on share buybacks and $10.53 billion on dividends since 2005. That aggressive approach toward reducing the share count and boosting the dividend should continue in the years ahead.

IBM’s ongoing efficiency improvements and acquisitions in high-growth market sectors should help keep profits on the rise. Since 2000, IBM has spent $22 billion to acquire more than 100 companies, all of which were profitable at the time of purchase. Wall Street projects per-share-profit growth of 11% this year and 9% next year, with 4% revenue growth in both years. IBM seems capable of exceeding those targets.

Conclusion

At 13 times trailing earnings, IBM is cheaper than its largest competitors and trades at an 11% discount to its five-year average P/E ratio. IBM is slated to release March-quarter earnings on April 19. An annual report for International Business Machines Corp. can be obtained at 1 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

Dec '09 $3.59 vs. $3.28 + 1% $132.85 -

$117.26

14 - 12
Sep '09 2.40 vs. 2.05 - 7% 122.88 - 99.50 13 - 11
Jun '09 2.32 vs. 1.98 - 13% 110.64 - 95.70 12 - 11
Mar '09 1.70 vs.

1.65

- 11% 99.86 - 81.76 11 - 9
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $95.76 $10.01 $2.15 $132.85
-
$81.76 13 - 8
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 $6.01 $1.10 97.88
-
72.73 16 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
92 70 84 95 80 57 21

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com