Every Thursday we bring you our best U.S. stock picks. You get our specific recommendation on the stocks we profile, with a full explanation of how we arrived at our opinion. You will read about stocks making moves you should know about, most often from coverage in our newsletter on U.S. investing, Wall Street Stock Forecaster.
IBM has a long history of drifting in and out of investor favour, mainly due to fear that new technologies will put it out of business.
However, IBM also has long history of shifting out of slowing businesses into faster-growing fields. For example, as computer prices fell in the 1990s, IBM expanded its more-profitable software and consulting operations. The company later unloaded its struggling personal computer operations, and is now selling its low-end server business. It will invest the proceeds in areas with better long-term potential, such as cloud computing and analytics software.
In addition, IBM’s well-known brand and global salesforce continue to give it a big advantage, particularly in developing countries.
INTERNATIONAL BUSINESS MACHINES CORP. (New York symbol IBM; www.ibm.com) started up in 1911 making machines that processed U.S. census data, as well as other industrial equipment such as time clocks and scales.
The company now gets 55% of its revenue by designing computer systems and managing them for business and government clients. It typically does this under long-term contracts, which cuts its risk.
In the past few years, IBM has aggressively expanded its software business. It’s particularly interested in analytics software, which helps clients gather and analyze a wide variety of data. Software now supplies 27% of IBM’s revenue.
The company’s computer hardware business, which accounts for 14% of its revenue, continues to shrink. Now it is selling its computer chip manufacturing operations to Globalfoundries Inc.
However, IBM will not get any payment for these assets. Instead, it will pay $1.5 billion to Globalfoundries to take over this money-losing business. IBM has also agreed to buy chips from Globalfoundries for the next 10 years.
Profit from the “four-year” rule
It’s time to profit from the “four-year rule.” U.S. Presidents tend to get a lot friendlier toward business and investors in the second half of each four-year U.S. Presidential term. Invariably U.S. stocks have risen in response. The latest two-year period began with the shift of Congressional power in the recent mid-term elections.
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Tech stocks: IBM dividend looks safe, yields 2.7%
While the sale of its chip business helps IBM focus on its more-profitable computer services and software divisions, many of its corporate clients are spending less on new computers as the global economy slows.
That’s mainly why IBM’s revenue in the third quarter of 2014 fell 4.0%, to $22.4 billion from $23.3 billion a year earlier. Earnings fell 18.1%, to $3.7 billion from $4.5 billion, while earnings per share declined 9.8%, to $3.68 from $4.08, on fewer shares outstanding.
IBM now expects that it will earn $16.15 a share in 2014, down from its earlier forecast of $18.00. The stock trades at just 10.0 times the new estimate. However, IBM’s strategy should spur its earnings as the economy rebounds. As well, the $4.40-a-share dividend seems safe and yields 2.7%.
IBM is a buy for long-term gains in our advisory on U.S. investing, Wall Street Stock Forecaster.
Tomorrow we look at a Canadian pharma stocks that takes a different approach from many drug firms.
Comments
Peter
Over the long term IBM has shifted from hardware to software, especially analytical software that crawls over other software to analyze how systems work (or don’t) in order to manage them. They have been very nimble by making this shift. They are also moving into the BIG data arena by doing this, the future of which ironically will ultimately depend on advances in hardware: basically quantum computing. They don’t have to get into that hardware to work with it, but there is the distinct possibility that such hardware will either require an entirely different kind of software platform in order to operate at all, or due to its fuzzy properties, will basically have some kinds of analytical properties built into it. Its going to be a challenge down the road to stay nimble enough to do this–but some companies certainly will. I would’t bet against IBM in that race.
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Over the long term IBM has shifted from hardware to software, especially analytical software that crawls over other software to analyze how systems work (or don’t) in order to manage them. They have been very nimble by making this shift. They are also moving into the BIG data arena by doing this, the future of which ironically will ultimately depend on advances in hardware: basically quantum computing. They don’t have to get into that hardware to work with it, but there is the distinct possibility that such hardware will either require an entirely different kind of software platform in order to operate at all, or due to its fuzzy properties, will basically have some kinds of analytical properties built into it. Its going to be a challenge down the road to stay nimble enough to do this–but some companies certainly will. I would’t bet against IBM in that race.
Thanks for your thoughts Peter. Pat