How a very large tech stock gets larger
As the high tech industry grows in importance, one of its oldest and biggest stocks shows how to keep on growing, says this U.S. advisory.
Not all tech stocks are shiny and new.
Plenty of high-tech companies have been born — and in many cases, already died — in the past few decades.
But one of the biggest of them all is over 110 years old.
The company that became International Business Machines was founded in upstate New York in 1896. Its history need not detain us (it didn’t work with computers then, of course, but calculating machines).
But its present sheds a good deal of light on an industry that will only become more important as the years go by.
And this venerable old firm, now known simply as IBM (NYSE-IBM) is one of the most attractive stocks in the industry, says a top U.S. advisory.
In fact, in its latest issue, Dow Theory Forecasts makes this stock its best buy, or “Analysts’ Choice.”
It all comes down to knowing how to make the right moves, and how to avoid making the wrong ones.
Revenues down, profits up
IBM’s revenues have been going down. Its profits have been going up.
In the past four quarters, the company’s revenues have declined by an average of 7 per cent. Its per-share profits have risen by an average of 15 per cent. That’s mighty fine calculating, if you can manage it.
There’s no great secret to the solution. “To cope with the falling sales, IBM has taken aggressive cost-cutting measures,” says this advisory. “With revenue growth likely to resume in 2010, the computer giant is well positioned to sustain brisk profit growth.”
The shrinking revenue did not drain away IBM’s cash. It holds $12.53 billion in cash, or $9.55 a share. That’s 27 per cent higher than a year ago. This stems from the continued growth of both operating and free cash flow.
Nanotechnology in Bulgaria
In an industry that seems to change almost daily, IBM keeps trying to stay a step ahead of the competition. It certainly has the size and experience to do so.
The company deals in every corner of the market, of course — computer hardware (16 per cent of it sales in the most recent six-month period), software (22 per cent of its sales) and services (59 per cent).
This advisory outlines just a few of its latest ventures. “IBM has proposed building microchips patterned after DNA and marketing television remotes that connect to Facebook. It dabbles in nanotechnology in Bulgaria and is working on software to store astronomical data from a new super telescope expected to generate more information in its first hour of operation than is currently available on the Internet.”
That’s just a small sample. IBM received 4,186 patents last year. That marks the 16th year in a row it has collected more patents than any other company in the U.S.
Not all patents turn out to be profitable, the advisory concedes, but IBM usually finds ways to make its patents pay.
The company is also putting its data analysis to work in public infrastructure projects funded by various governments — like water treatment systems in China, for instance. It hopes to do the same for health care and energy projects in the U.S.
Better left alone
While plenty of new ventures promise to pay off, some are better left alone.
Thus, worried about the antitrust review and possible costs, IBM withdrew its $7 billion offer for Sun Microsystems (NASDQ-JAVA), developers of the Java software used in so many computer systems.
“But IBM has since managed to capture some of Sun’s market share without the expense or regulatory hassles.”
Meanwhile, Oracle (NASDQ-ORCL) is still battling uphill in order to bring its $7.4 billion offer for Sun to completion. Jittery clients are jumping ship — IBM says it has scooped up 250 former Sun customers in the first half of 2009.
Cheaper than its rivals
“During earnings season, IBM rarely misfires,” says the advisory. “It has grown per-share profits for 21 consecutive quarters and hasn’t fallen short of the consensus since the March 2005 period.”
A month ago, IBM reaffirmed its per-share profit target of at least $9.70 and its expectations of $10 to $11 next year. Wall Street pretty much agrees, expecting 10 per cent growth this year and next. Sales growth should also reach the black at about 3 per cent after last year’s 9 per cent decline.
At about 13 times trailing earnings, IBM is cheaper than leading rivals Dell (NASDQ-DELL) and Apple (NASDQ-APPL). It’s not cheap, at $118, but it’s the best buy you can make in this industry right now, as far as this advisory is concerned. And it pays an annual dividend of $2.20.
As Canadian investors watch Nortel fade into the sunset and ponder the ups and downs of Research in Motion, it’s worth keeping one thought in mind.
In an industry that has come to pervade our lives, the companies that will win the profit race are those that know how to change, what to change and when to change it.
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