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
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
Frankly, that ought to be enough to convince you of IBM's reach. But if more proof is needed, I bring you Amazon.com
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
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% |
* 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!
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Fool contributor Tim Beyers, ranked 1,309 out of 11,823 in Motley 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 Fool profile . Both Amazon and Starbucks are Motley Fool Stock Advisor selections. 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's disclosure policy .
