It’s Time to Give IBM Props

Advertisement

Back in early 2000, when the dot-com bubble was in full effect, there was a sense that large-cap tech companies like Microsoft(NASDAQ:MSFT), Cisco (NASDAQ:CSCO) or Intel (NASDAQ:INTC) somehow more attractive than the scores of Internet startups going public. These companies had profits, the thinking went, and could weather a shakeout.

That didn’t really happen. Eleven years on, the stocks of most tech giants are still deeply underwater. Cisco is still down 65% from its trading level at the beginning of 2000, while Microsoft is down 56% and Intel is down 49%.

And Dell (NASDAQ:DELL), the great PC giant that was one of the best investments of the ’90s? It’s down 70%.

However, there is at least one longtime tech giant that has gained significantly since then: IBM (NYSE:IBM), which is up 53% from early 2000. Back then, few would have guessed that IBM would be a good high-tech investment. It was, if anything, an emblem of old tech – a hoary 120-year-old company making a long and lumbering transition from hardware to software. With the Internet on the rise, who would want to invest in that?

It turns out that IBM was exactly the kind of contrarian investment that makes money when markets are in manias. As the company made clear in a briefing with investors this week, IBM stock bought in late 2000 would have returned 107% to shareholders by the end of last year, compared with a 39% return for the Dow.

Today, IBM is the 20th largest company in the Fortune 500, ranked by revenue. But if those same 20 companies are ranked by profit, IBM comes in at No. 3, behind Wal-Mart (NYSE:WMT) and Exxon Mobil (NYSE:XOM). Since 2000, the company has added $10 billion in pretax income, nearly tripled its earnings per share and generated $109 billion in free cash flow.

Much of IBM’s growth has come through acquisitions. In all, IBM spent $32 billion to buy 116 companies over the past decade, from small startups to its $5 billion purchase of Cognos. Many were well-timed: In 2001 and 2002, while tech companies were struggling and valuations were low, IBM made several billion-dollar deals including software companies Informix and Rational Software as well as PWC, the tech consulting arm of PriceWaterhouseCoopers.

In 2011, IBM still isn’t as sexy as names like Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) or Facebook, nor does it generate anywhere near the buzz coming from those companies.

But it does plan to maintain its strategy of buying companies that fit into its offerings in software and IT services. CFO John Loughridge told investors this week that IBM could spend $20 billion on acquisitions through 2015.

Even as IBM has been adding acquisitions, it has worked to integrate its targets into the company’s overall structure. The company said that by synthesizing everything from finance and HR to sales and supply chains, it’s reduced the amount it spends on shared services to $12.1 billion in 2009 from $16.3 billion in 2005.

The company estimates that similar productivity initiatives, along with share buybacks, will keep profits growing by 11% a year through the next five years. IBM didn’t offer a profit forecast, but it expects to see its non-GAAP operating earnings per share rising above $20 in the next five years from last year’s figure of $11.67 a share.

Wall Street’s reception of IBM’s presentation was positive. The stock jumped 4% to $165.86 on Wednesday before suffering the broader market’s selloff later in the week. Deutsche Bank, RBC Capital and Caris & Co. all raised their price targets for IBM’s stock to between $176 and $200.

That bullish sentiment has been around for a while. IBM’s shares have risen 31% in the past six months – once again beating Intel, Microsoft and Cisco by a significant amount. Technology may be constantly evolving, but somehow hoary old IBM manages to thrive.


Article printed from InvestorPlace Media, https://investorplace.com/2011/03/its-time-to-give-ibm-props/.

©2024 InvestorPlace Media, LLC