The Best Blue Chip for 2007: IBM

When you term something a "dinosaur," the connotation is decidedly negative. It's no different in the business world, where "dinosaurs" are the large corporations that are either too big or too slow to survive in a rapidly changing world.

I have often considered the term unfair, if only because dinosaurs ruled the planet for an incredibly long time -- 165 million years, to be precise. Before we humans can claim any bragging rights, we will need to demonstrate our superiority for another 158 million years! For all of their bad press, dinosaurs were actually quite successful.

With this little lesson in paleontology in mind, my belated pick for best blue chip for 2007 is one of those companies that might be easy to dismiss as a dinosaur: IBM (NYSE: IBM  ) . But like a T-Rex, Big Blue's size, speed, and ferocious nature suggest that it will not only be with us for a good, long while, but it also has an excellent chance of growing larger and stronger in the year ahead.

It starts with R&D .
IBM has always been a research-and-development powerhouse. With an annual R&D budget of more than $6 billion, a number of state-of-the-art research labs, and a team of world-class scientists, there is no reason to believe that Big Blue won't continue to lead the world in patents received again in 2007 -- as it has for the past 14 years.

In 2005, the last year for which full figures are available, the company received 2,974 patents -- a thousand more than its closest competitor and almost 1,500 more than Hewlett-Packard (NYSE: HPQ  ) , Intel (Nasdaq: INTC  ) , and General Electric (NYSE: GE  ) .

Of course, patents and intellectual property alone are not enough to sustain a company's success. It must translate those patents into real products. And here, too, IBM has a proven track record.

In the past year, I have written about how Big Blue is seeking to keep next-generation computer chips cool, how it's creating new software tools that can analyze video data from surveillance cameras in real time, and how it's perfecting SoulPad-- a personalized virtual computer that can be transferred from one machine to another.

Beyond that, the company's long-term initiatives in nanotechnology and supercomputing both provide a deep well from which future technologies and products are likely to flow.

For instance, there is no reason to think that new nanomaterials and carbon nanotubes won't be used in the production semiconductors early next decade, or that IBM's supercomputers, which are already being employed in leading universities and the Nuclear Security Administration, won't soon become part of the arsenal for pharmaceutical giants such as Pfizer (NYSE: PFE  ) , Merck (NYSE: MRK  ) or GlaxoSmithKline (NYSE: GSK  ) in their unending quest to discover new drugs.

It's fueled by a culture of innovation .
IBM success is not, however, simply the result of superior technology. Ever since the company was revitalized under Louis Gerstner in the early 1990s, it has not been afraid to challenge the status quo.

Earlier this fall, IBM announced that it was willing to open many of its patents to public scrutiny -- including from its competitors -- in an effort to foster innovation on a global scale. This summer, it unveiled a massive expansion of its open-source movement to facilitate advancements in Web application servers, system management, and grid computing. And perhaps most impressive was its decision to sell its personal-computer business to Lenovo and get out of the PC industry altogether.

Such dramatic acts hardly seem the stuff of an inflexible dinosaur at risk of becoming extinct.

And it's sustained by its consulting business
But for all of its R&D, innovative culture, and breakthrough thinking, the company must still make money. And it is doing so. In the third quarter, IBM reported a 50% gain in net profits, and it is now trading at just 14 times its forward earnings.

I believe the company will continue this success in 2007 in large part because its Global Services consulting business has access to -- and understands -- the new technologies that are coming out of its labs.

For example, as IBM researchers discover new material-science advances, its consultants will help businesses across a myriad of industries understand how those materials can be used to improve existing products and create new ones. Similarly, by tapping into the open-source movement, harnessing the power of its new software acquisitions, and understanding the immense potential of everything from SoulPad and the Smart Surveillance System to its supercomputers, IBM consultants are poised to provide their clients the tools and information they will need to stay competitive.

Foolish final word
Alas, the Fools have already announced the winner to the contest, but I wanted to make my nomination known after the fact. (Wouldn't it be great to put forward congressional candidates after the election?)

Nevertheless, I am not alone in my bullish prognosis for Big Blue. On Motley Fool CAPS, the Fool's stock-ranking and investing-intelligence database, 279 other people have it ranked as an outperformer, while only 90 expect it to underperform. And among CAPS All-Stars, 56 believe it will outperform, and only eight think it will trail the market.

But don't just take my word for it, or that of the broader community. Jump in and try Motley Fool CAPS for yourself.

Pfizer is a Motley Fool Inside Value recommendation. Glaxo is a Motley Fool Income Investor selection, and Merck is a former Income Investor pick.

Fool contributor Jack Uldrich finds it hard to get blue over Big Blue. He owns stock in IBM. The Fool has a strict disclosure policy.


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