Inside Wall Street: Don't ignore reliable old Big Blue
Longtime tech leader IBM has a lot more power to grow than some investors foresee.
Just because IBM (IBM) has been a steady, reliable blue-chip growth stock all these years is no reason to get bored with it, as some investors seem to feel these days. You will miss out on IBM's continued solid growth if you take its stock for granted.
True, the buzz these days in the fast-moving world of technology is all about the social networks such as Facebook and Groupon (GRPN), even somewhat eclipsing a bit the relatively new tech leaders Apple (AAPL) -- which hit an-all-time high of $500 a share Monday -- Google (GOOG) and Microsoft (MSFT). But information technology wizard IBM is hardly mentioned anymore among the must-own and truly exciting tech stocks.(Microsoft owns and publishes Top Stocks, and MSN Money site.)
It isn't hard to imagine why. The reliable Big Blue, the granddaddy of all tech wonders, has been ratcheting up strong revenue and earnings, so most investors are persistently looking for the Next Big Thing or the latest new gadget to latch on to. In IBM's case, some analysts worry about the "lack of meaningful upside" in the stock. The usual argument for their being at least neutral on the stock is IBM's "better fundamentals are already reflected in the stock."
Indeed, the stock, now at $193 a share, is trading close to its 52-week high of $194.90, as the stock has been a huge winner since January 2009, when it hit a low of $69 a share. Some market watchers therefore believe that with such a phenomenal rise, the stock would lose momentum and upside power. Wrong. Such a conclusion may prove true for stocks that have yet to show the sterling prowess of growth that IBM has demonstrated over the years, including the dark months of the recent recession.
IBM is "well positioned to weather any economic storms that may arise, given its diversity," says Dylan Cathers, an analyst at S&P Capital IQ, who rates the stock a "strong buy." The "healthy gains in the majority of the company's segments will help drive earnings per share," he adds, along with a robust share-buyback program. Adding to the stock's appeal is a dividend yield of almost 1.6%.
The bulls on the stock view it as capable of climbing to as high as $230 within 12 months. Shaw Wu, who follows IBM at the investment firm Sterne Agee, says this leading global provider of info-tech infrastructure is "unparalleled in its ability to solve customer problems with its deep industry expertise, broad set of offerings, and global presence." His 12-month price target of $230 a share is based on what he considers "reasonable and conservative 13.5 multiple" on his 2012 earnings forecast of $17 a share.
The stock deserves to trade at a premium, the analyst says, "given its predictability and stability (and its) earnings-per-share growth profile of 10%-15%." He believes IBM's earnings expectation and guidance of $20 a share in 2015 are achievable.
"The beauty of the IBM story is that double-digit earning-per-share growth is not dependent on the top line but rather on a growing mix of higher-margin software (23% of revenue) through organic means and acquisitions," Wu says. He thinks IBM is what other companies in the enterprise space "aspire to be, similar to what Apple is on the consumer space," Wu says. He goes further to venture that players in the industry such as Dell (DELL), Hewlett-Packard (HPQ) and Oracle (ORCL) "are trying to emulate IBM."
Indeed, let's not forget that IBM was the first to realize that the value-added element in IT isn't in hardware but in software, services and hardware. While a lot of attention has been focused on IBM's powerful software and service businesses, Wu says, IBM has remained "committed to hardware with continued development of its own systems and semiconductors."
What distinguishes IBM from its peers is its ability to custom-package software and services with hardware, Wu says. "Governments and customers around the world go to IBM to help solve their real-world problems," the analyst says. "Only IBM can do that, and IBM is arguably at the forefront."
Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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