Stocks for newborns: IBM leads for generations

This tech stalwart has stood the test of time.

By Jonathan Berr May 1, 2012 4:14PM
Credit: © ODD ANDERSEN/AFP/Getty Images
Caption: The logo of IBMOne in a special Top Stocks series on buying stocks for newborns.

(IBM) ruled the technology roost long before Hewlett-Packard (HPQ), Dell (DELL) Apple (AAPL), and Google (GOOG) were glints in the eyes of their founders. 

It still does, to some extent, and will continue to because it provides customers the total package of hardware, software and services.

Big Blue owes its recent success to Louis Gerstner, who as CEO saved the company from almost-certain bankruptcy by focusing on customer needs and embracing desktop computing.  Gerstner's overhaul of IBM, which included breaking the company's famously paternalistic culture, was also championed by successor Sam Palmisano and continues to pay dividends today.

Under Palmisano's stewardship, IBM made one of its smartest buys, the 2002 purchase of the consulting arm of PricewaterhouseCoopers for $3.5 billion. The strategy enabled IBM to cement its foothold with American business and has been copied by rivals because it has been a huge success. IBM's revenue grew more than 30% between 2002 and 2011, an impressive feat made even more so given the size and age of the company. One of the biggest champions of the PwC deal was Virginia Rometty, who became Palmisano's successor as CEO.

Shares of IBM have surged more than 146% over the past decade, an incredible performance for a company founded in 1911. The average one-year price target on the stock is $216.45, about 5% above where it recently traded. Its price-to-earnings multiple of 15.44 looks cheap compared with its peers, whose multiples top 19.

One stock strategist talks about IBM's revenue segments and future growth strategy in the following video.

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IBM has so many things going for it that it's hard to focus on just one. The company is the world's largest provider of information-technology services and a leading provider of business consulting services. It is among the world's top software companies as well and a top producer of servers. IBM's foothold in most markets remains strong and its pipeline remains strong. Its services backlog, a key metric for Wall Street, was $139 billion as of the last quarter.

It also continues to innovate and has topped the list of U.S. patent recipients for more than two decades. That means that a customer can go to IBM for advice on cloud computing or an efficient workplace, or for insight on consumer trends. IBM is adept at finding practical solutions for its breakthroughs. For instance, Watson, the IBM supercomputer that crushed two "Jeopardy" champions, is now advising Citigroup (C) about investment risk.

IBM a 33.7% share of the server market, according to Gartner, versus 26.9% for HP and 14.8% for Dell, which is gaining ground at the expense of larger rivals. An IBM spokesman told Bloomberg News earlier this year that IBM "greatly" outperformed HP in the market for powerful (and high-priced) servers. IBM also is beating HP in the storage market as well, where IDC pegs its share at 15.2% to its rival's 10.3%.
Investors in IBM are covered in good times, when customers buy new software, hardware and services, and in bad, when the company's consultants can advise clients onhow to save money. These days, as technology companies with shaky accounting command ridiculous multiples, IBM has stood the test of time. While there are plenty of flashier technology companies, none has IBM's staying power. That quality is vital when investing over the long haul, which is vital when a contemplating a child's future.

--Jonathan Berr has no positions in the stocks mentioned here. Follow him on Twitter @jdberr

More from the series


May 1, 2012 8:32PM
Smile I thought the mainframe and personal computer where dead?
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