INTERNATIONAL BUSINESS MACHINES CORP. $192 (New York symbol IBM, Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.1 billion; Market cap: $211.2 billion; Price-to-sales ratio: 2.1; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.ibm.com) started up in 1911, which makes it the world’s oldest computer company. Today, it operates in over 170 countries.
IBM continues to shift out of less profitable businesses, like making personal computers, and toward more promising activities, such as designing computer systems and managing them for clients. Long-term maintenance contracts give IBM more dependable revenue streams; services now supply 56% of its sales.
The company is also expanding its software business. It’s particularly interested in developing analytics software, which helps businesses and governments gather and analyze a wide variety of data. For example, IBM’s Smarter Planet initiative combines advanced hardware and software to help clients solve complex problems, such as traffic congestion. Software supplies 24% of IBM’s revenue.
The company still makes computer hardware (17% of revenue), mainly mainframes for large organizations. The remaining 3% comes from its financing division.
IBM’s revenue fell 7.6%, from $103.6 billion in 2008 to $95.8 billion in 2009, as the recession hurt demand for its computers. Revenue recovered with the economy and rose to $106.9 billion in 2011.
However, revenue in 2012 fell 2.3%, to $104.5 billion. That’s partly because IBM sold its point-of-sale business, which makes cash registers and other equipment for retailers. As well, mainframe sales declined as clients put off purchases until IBM launched new models of its System z machine late in the year. Demand for these computers should be strong in 2013.
Earnings gained despite ripple
The company’s earnings rose 34.6%, from $12.3 billion in 2008 to $16.6 billion in 2012. Due to fewer shares outstanding, earnings per share jumped 60.9%, from $8.93 in 2008 to $14.37 in 2012.
IBM continues to invest in research, which helps it maintain its dominance in the rapidly changing technology business. It spent $6.30 billion (or 6.0% of its revenue) on research in 2012, up 0.7% from $6.26 billion (or 5.9% of revenue) in 2011.
About 60% of this spending goes toward supporting current products, such as developing new algorithms for its analytics software.
IBM also continues to work on advanced technologies that may take years to bring to market. These include quantum computing systems that would be much faster than current machines. It’s also developing ways to store information on just a few atoms. This would greatly expand a computer’s capacity.
In 2012, IBM received 6,478 patents in the U.S., up 4.8% from 2011. This was also the 20th consecutive year that IBM received more patents than any other firm. Licensing intellectual property generates around $1.1 billion a year in pre-tax income for IBM.
Cloud computing is another growth area for the company. Many businesses are now switching to cloud systems because they cut their computer maintenance costs and let them focus on their main operations. IBM’s strong brand gives it an edge over smaller cloud competitors.
Emerging markets play a bigger role
IBM’s strong reputation is also helping it expand in fast-growing markets like China, Russia, India and Brazil. In 2012, revenue from countries like these rose 4.2% (or 6.9% if you exclude the negative impact of foreign exchange rates). These markets now account for 24% of IBM’s revenue. It expects that to rise to 30% by 2015.
The company is also expanding by acquisition. In 2012, it spent $4.0 billion buying 11 other firms. The biggest was its $1.35-billion purchase of Kenexa Corp., a Pennsylvania-based maker of software, including automated tests and surveys, that helps businesses recruit and train employees.
IBM continues to target companies that enhance its technology. For example, in April 2013 it paid an undisclosed sum for UrbanCode, a Cleveland-based private company whose software helps businesses quickly update their programs (or apps) for mobile devices. The outlook for this business is bright, particularly as more people use smartphones and tablets instead of personal computers.
The company’s strong balance sheet gives it plenty of room to keep making acquisitions. Its $24.7 billion of long-term debt (as of March 31, 2013) is a low 12% of its market cap. It also holds cash and investments of $12.0 billion, or $10.73 a share.
Ambitious goal looks attainable
Even with the uncertain economy, IBM expects its earnings to rise to $16.70 a share in 2013. The stock trades at just 11.5 times that estimate.
The company still aims to raise its earnings to $20.00 a share by 2015. However, it may have to cut workers or find other cost savings to reach this goal if its revenue growth slows. The company will also likely raise its dividend later this year. The current rate of $3.40 yields 1.8%.
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