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IBM Is Firing on All Cylinders

A strong profit report brings a 52-week high


The social-networking phenomenon has been grabbing all of the headlines lately, but today it’s one of the oldest tech stocks that’s getting all the buzz.

Late Monday, IBM (NYSE:IBM) reported blowout numbers across the board, driving its stock to a 52-week high in Tuesday’s trading. The headline results were stellar, with EPS coming in at $3.09 vs. estimates of $3.05. Even more notably, given the sluggish state of the economy, revenue of $26.7 billion far exceeded analysts’ estimates of $25.4 billion. Gross margins also surprised to the upside, at 46.4% vs. estimates of 46.0%, and the company raised its 2011 full-year profit forecast.

Drilling down further, IBM’s results painted a picture of strength across all business lines. Its four main divisions – technology services, business services, software, and systems/technology – all exceed revenue estimates by a comfortable margin. Software sales rose 17%, and the company reported the best fiscal fourth quarter for its hardware segment in five years. The strength in these divisions is probably the most encouraging development, since the positive results from IBM’s services division is now old news. Analysts have been looking for the company’s other segments to pick up the baton and start showing meaningful growth. This most recent set of numbers demonstrates that this is indeed the case, and that the company is hitting on all cylinders.

Further, IBM’s results show that businesses, which are flush with cash, are willing to spend despite the uncertain economic backdrop. On Tuesday, this revelation propelled not just IBM, but also the other tech stocks dependant on corporate spending, such as Oracle (NASDAQ: ORCL), SAP (NYSE: SAP), EMC (NYSE: EMC), and VMware (NYSE:VMW).

Coming into the quarter, expectations have been for weak business spending – a worry that has been reflected in the underperformance of the tech sector overall. If IBM’s report is a sign that this concern has been overplayed, there may be some good upside in the sector as investors begin to factor in stronger second-half results.

As for IBM itself, the stock is now trading above $180, up from $147 at the start of the year and well above its $72 price at the depth of the financial crisis in late 2008. This puts the stock at a forward price-to-earnings ratio of about 12.5, which is in line with its historical level.

The question now is whether to buy IBM at its 52-week high when it appears fairly valued, or to take a shot at one of the unloved, cheaper names in the tech sector, such as Cisco (NASDAQ:CSCO), or Hewlett-Packard NYSE:HPQ). IBM was looking extended on its technicals following its Tuesday rally, which indicates that it will probably pay to be patient rather than chase the stock higher on the knee-jerk reaction to the earnings number.

Broadly speaking, however, IBM is a stock that’s clearly working, showing no underlying weakness, and that has been flying under the radar for most of this year. At this stage, IBM’s strong fundamentals indicate that the stock is likely a safer bet than waiting for a turnaround in one of the sector’s laggards.

Article printed from InvestorPlace Media,

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