Far From Stodgy, IBM Welcomes Change


  Recent Price


  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$143.03 - $116.00

IBM ($141; IBM) shares pulled back from an all-time high when the company announced September-quarter results. At first glance, the results looked strong, with IBM posting higher per-share earnings for the 31st consecutive quarter. Profits exceeded the consensus for a fifth consecutive quarter, while revenue rose 3% and also topped analyst targets.

The services backlog held firm at $134 billion, but investors interpreted a 7% decline in new service contracts as a sign of potential weakness in coming quarters. New outsourcing contracts fell 15% to $5.7 billion, though IBM said it signed a $1.7 billion deal in early October.

Companies remain cautious in their spending on discretionary and long-term technology contracts. However, shorter deals can speed up customers’ return on investment, and IBM continues to sign up new business. Within IBM’s software unit (22% of nine-month revenue), middleware products and operating systems generated solid growth. In hardware (17%), new mainframe products have propelled sales higher.

The stock earns above-average ranks for all six Quadrix® categories, contributing to an Overall score of 94. IBM, yielding 1.8%, is a Focus List Buy and a Long-Term Buy.

Business breakdown

Fifteen years ago, weakness in services contracts would have had little effect on IBM stock. At that time, IBM mostly sold hardware and lived off its reputation as a key player in the proliferation of the personal computer. But IBM sold its PC unit in 2005 to focus on businesses with higher margins. “We wanted to get out before it was obvious to everyone” that the PC era was ending, CEO Sam Palmisano said last month. “I couldn’t give it away today.”

Technology and business services now generate 59% of IBM’s sales. IBM is also the world’s third-largest software developer and No. 2 in both external data storage (14% market share) and servers (28%). That broad product lineup allows IBM to integrate hardware, services, and software into customized packages.

Since Palmisano took charge in 2002, IBM has spent more than $20 billion to acquire at least 100 companies, often paying only modest premiums, with no deals exceeding $5 billion. Individually, such small purchases will not move the needle of a company with $179 billion in stock-market value. But collectively, the deals have profitably expanded IBM’s services and software portfolios. IBM’s return on assets, investment, and equity have climbed in each of the last four years and now exceed those of Cisco Systems ($23; CSCO), EMC ($21; EMC), Hewlett-Packard ($43; HPQ), and Oracle ($29; ORCL). IBM plans to spend $20 billion on acquisitions in the next five years, with a focus on emerging markets.


IBM sees profits of at least $20 per share by 2015. The stock trades at 13 times trailing earnings, 9% below its five-year average P/E and 28% below the average technology stock in the S&P 1500 Index. 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.




      Price Range

P/E Ratio

Sep '10 $2.82 vs. $2.40 + 3% $136.11 -


13 - 11
Jun '10 2.61 vs. 2.32 + 2% 133.10 - 116.00 13 - 11
Mar '10 1.97 vs. 1.70 + 5% 134.25 - 121.61 13 - 12
Dec '09 3.59 vs.


+ 1% 132.85 - 117.26 14 - 12



52-Week Price Range

P/E Ratio

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-
Value Quality Financial
94 66 73 88 75 97 55

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

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