IBM: Why Big Blue Is a Big Buy

by Jonathan Berr | July 20, 2012 7:00 am

IBM: Why Big Blue Is a Big Buy

IBM (NYSE:IBM[1]) might be the perfect stock for optimistic investors because its fortunes are so closely tied with the broader economy.

Big Blue reported better-than-expected[2] quarterly results on Wednesday and raised its earnings guidance. It was the latest good news from the tech giant. Last year, billionaire Warren Buffett[3] made headlines when he snapped up shares of IBM, his first-ever technology investment.

Wall Street also thinks the company has room to run. Analysts have an average 52-week price target on the stock of $213.8, nearly 10% above where it currently trades. The shares are up more than 6% this year, including Thursday’s rally and are still cheap. With a price-to-earnings multiple of 13.69, IBM is trading under its five-year high of 15.12, according to Reuters.[4]

Of course, IBM isn’t immune to the economic slowdown[5]. Revenue in the Americas rose 1% in the last quarter on a constant currency basis and was flat in Europe and the Middle East. But among the bright spots are the BRIC countries, where revenue grew 12% on a constant currency basis. In fact, IBM showed double-digit increases in more than 30 countries.

Big Blue also is poised to benefit from trends such as the growth in cloud computing and the increasing importance of software to make companies run more efficiently. Not surprisingly, new CEO Ginni Rometty is emphasizing software because its margins and growth prospects are better than IBM’s other businesses. The Armonk, N.Y., company plans to hire about 300 sales people each month until the end of the year to peddle its software products. It’s a smart move.

Market researcher Gartner estimates that[6] worldwide info-tech spending will reach $3.628 trillion this year and $3.786 trillion the next year, increases of 3% and 4.4%, respectively. Though the overall rate is lackluster, businesses are willing to open their checkbooks for enterprise software. Spending in that area is expected to jump 4.3% to $281 billion in 2012 and 6.9% to $301 billion in 2013

Although most of the public thinks of IBM as the company behind supercomputers such as Watson, which famously beat two of the smartest humans to ever play Jeopardy, it’s a formidable force in business software[7]. IBM is the market share[8] leader in “middleware[9],” software that acts as a “glue” between two existing programs, and in social software[10], which enables businesses to create their own social networks.

Corporate America[11] has more faith that IBM can develop these worker productivity applications in a more secure fashion than Twitter or Facebook (NASDAQ:FB[12]). Big Blue’s software brands include Lotus, Tivoli and WebSphere.

IBM is vital to Big Business in other ways. It leads the market in servers[13], the backbone of any IT network. Thanks to its 2002 acquisition of PricewaterwaterhouseCoopers Consulting, IBM is one of the world’s largest consulting firms.

Its services backlog as of June 30 was $136 billion, flat year-over-year when currency is considered. A potential counter to this trend may be that when the economy turns sour, companies crave advice on how to cut costs. IBM’s Smarter Planet initiative[14], for example, seeks to improve “systems and processes that make the world work” in everything from electric grids to cars to agriculture.

There are other potentials boons to the business. As Bloomberg News[15] noted, IBM also is a huge player in cloud computing, a business that that is expected to reach $7 billion in 2015.

IBM’s potential for growth outweighs the risks it faces from unpredictable economic headwinds. The stock should have a place in most portfolios.

Jonathan Berr does not own shares of the companies listed here. Follow him on Twitter @jdberr.

Endnotes:
  1. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  2. reported better-than-expected: http://www.bloomberg.com/news/2012-07-18/ibm-raises-annual-forecast-after-second-quarter-beats-estimates.html
  3. Warren Buffett: http://www.washingtonpost.com/blogs/innovations/post/warren-buffett-and-why-ibm-is-just-like-a-railroad/2010/12/20/gIQAyfsZiN_blog.html
  4. according to Reuters.: http://www.reuters.com/finance/stocks/financialHighlights?symbol=IBM.N
  5. immune to the economic slowdown: http://www-03.ibm.com/press/us/en/pressrelease/38405.wss
  6. Gartner estimates that: http://betanews.com/2012/07/10/gartner-says-2012-it-spending-will-surpass-3-6-trillion-worldwide/
  7. formidable force in business software: http://investorplace.com/2012/07/3-great-values-in-large-cap-tech/
  8. market share: http://www-03.ibm.com/press/us/en/pressrelease/37376.wss
  9. middleware: http://searchsoa.techtarget.com/definition/middleware
  10. in social software: http://www-03.ibm.com/press/us/en/pressrelease/38066.wss
  11. Corporate America: http://www.bloomberg.com/news/2012-05-14/sap-s-facebook-for-companies-trails-ibm-in-soaring-market.html
  12. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  13. the market in servers: http://www.zdnet.com/blog/btl/dell-picks-up-server-share-as-ibm-is-no-1-says-gartner/70383
  14. Smarter Planet initiative: http://www.ibm.com/smarterplanet/us/en/overview/ideas/index.html?re=spf
  15. Bloomberg News: http://www.bloomberg.com/news/2012-07-18/ibm-raises-annual-forecast-after-second-quarter-beats-estimates.html

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