A Foolish Treat: IBM

Fools my age may remember the Purple People Eater -- the one-eyed, one-horned, flying monster that was sometimes used to describe the front four defensive linemen of several dominant Minnesota Vikings football teams from the 1970s.

But I say the purple beast is out and the blue beast is in. The Big Blue Beast, that is. Of course I'm talking about IBM (NYSE: IBM  ) , whose stock, which trades for just 14 times forward earnings as I write, is still as gooey and delicious as any Halloween treat.

One-upping Dr. Frankenstein
Mad scientists having nothing on IBM. The Big Blue Beast is a premier researcher, having received more patents for its innovations than any other American firm over each of the past 13 years. And BusinessWeek earlier this year named IBM the tenth most innovative company. Others in the top 10 include Google (Nasdaq: GOOG  ) in second place, Toyota (NYSE: TM  ) in fourth, and Starbucks (Nasdaq: SBUX  ) in ninth.

Frankly, that ought to be enough to convince you of IBM's reach. But if more proof is needed, I bring you Amazon.com (Nasdaq: AMZN  ) . IBM has filed a suit against the e-retailer for infringing five of its patents, which, collectively, seem to describe the sum total of Amazon's business. Even if the Big Blue Beast has got it wrong in this case -- which is certainly possible -- it's at least telling that IBM has Internet patents that date back to work begun during the1980s.

Re-animating software
The Big Blue Beast is also an avid hunter with a voracious appetite. Among his latest victims was FileNet, which IBM purchased for $1.6 billion. Impressive, you say? Sure it is, but more impressive still is that the deal was done for cash.

It's also one of many IBM software chief Steve Mills has planned. He recently told TheStreet.com that the Big Blue Beast will perform eight to 11 deals a year on the theory that it can accelerate revenue in the businesses it acquires, leading to higher returns on capital.

If that seems torturous, it's because most others do exactly the opposite. Oracle (Nasdaq: ORCL  ) , for example, has cut as ruthlessly as Saw circus-master Jigsaw in acquisitions of PeopleSoft and Siebel. Yet IBM believes that by leveraging its massive services unit, it can boost its revenue growth rate in software by 50% or more.

A massacre in the margins|
Surely, that sounds alluring, like the ghostly Siren call of a long-lost loved one. But there's also reason to believe that IBM's plan has substance. Witness the Big Blue Beast's rapidly improving margins:

Metric

TTM*

2005

2004

Gross margin

41.3%

40.1%

36.9%

Operating margin

9.6%

8.8%

7.8%

Net margin

9.5%

8.7%

7.8%

Free cash flow margin

9.7%

11.9%

8.5%

Source: Capital IQ, a division of Standard & Poor's.
* Trailing 12 months

Mix in the latest quarterly results, which included a 50% gain in net profit and a 77% gain in free cash flow, and IBM quickly transforms from beast to beauty.

A monster ... for your portfolio
And that's especially true when it comes to valuation. My own tinkering suggests that the Big Blue Beast was valued to grow at 0% forever at $83 a share, which it traded for just a few months ago. IBM is up almost 10% since, but that's not nearly enough to call the stock fully valued. So expect this monster to eat the market for at least the next year, and perhaps for many more years to come. And, of course, a happy and Foolish Halloween to you!

Does your portfolio feature a few stock market zombies? Banish them for good. Get help from any of our investing newsletters. Like a chocolaty Halloween treat, you can try any of them for free.

Fool contributor Tim Beyers, ranked 1,309 out of 11,823 inMotley Fool CAPS, just isn't a chocolate kind of guy, except for Kit-Kat bars. Mmmmmmm. Tim owns shares of Oracle. Get the skinny on everything in his portfolio by checking Tim's Foolprofile. Both Amazon and Starbucks areMotley Fool Stock Advisorselections. The Motley Fool's disclosure policy haunts Wall Street.

The Motley Ghoul's Tricks or Treats represents the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc., or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool'sdisclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 516846, ~/Articles/ArticleHandler.aspx, 10/25/2014 4:54:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 19 hours ago Sponsored by:
DOW 16,805.41 127.51 0.76%
S&P 500 1,964.58 13.76 0.71%
NASD 4,483.72 30.92 0.69%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2014 4:01 PM
IBM $162.08 Down -0.10 -0.06%
International Busi… CAPS Rating: ****
AMZN $287.06 Down -26.12 -8.34%
Amazon.com CAPS Rating: ***
GOOGL $548.90 Down -4.75 -0.86%
Google (A shares) CAPS Rating: ****
ORCL $38.73 Up +0.50 +1.31%
Oracle CAPS Rating: ****
SBUX $75.81 Up +0.97 +1.30%
Starbucks CAPS Rating: ****
TM $114.51 Up +1.10 +0.97%
Toyota Motor Corp… CAPS Rating: ***

Advertisement