Foolish Forecast: IBM's International Business Machine

Next Wednesday evening, we'll get second-quarter numbers and a business update from the company also known as International Business Machines, IBM (NYSE: IBM  ) . As you'll see below, all three parts of the company name ring very true right about now.

What analysts say:

  • Buy, sell, or waffle? Big Blue has 20 analysts watching its every move. Fourteen of them say we should buy this stock, and the other six are holding for now. In our Motley Fool CAPS database, more than 1,200 users have collectively rated it a three-star stock.
  • Revenues. Wall Street expects about $23.1 billion of sales, up 5.3% from last year's $21.9 billion.
  • Earnings. $1.47 per share would satisfy your average analyst. That would be an 11% improvement over the year-ago quarter.

What management says:
In the last earnings call, CFO Mark Loughridge pointed out IBM's 11 straight quarters of widening operating margins. The star performer in the company's stable of hardware, software, and services was the software segment. Tivoli sales grew 18% year over year, and the WebSphere platform improved by 14%. The high-margin nature of software sales is the coup de grace here.

What management does:
That attractive shift in product mix, and an aggressive strategy of acquisition and divestitures in the General Electric (NYSE: GE  ) mold, have whipped margins into shape. IBM is also squeezing out greater returns from its leaner capital structure, as seen in the ROA and ROE trends.

Margins

12/2005

3/2006

6/2006

9/2006

12/2006

3/2007

Gross

40.4%

41.2%

41.7%

42.0%

42.1%

42.3%

Operating

14.4%

14.8%

15.1%

15.1%

15.3%

15.3%

Net

8.7%

9.3%

9.5%

10.2%

10.4%

10.4%

FCF/Revenue

12.1%

13.5%

12.9%

12.2%

11.6%

11.2%

Efficiency Ratios

12/2005

3/2006

6/2006

9/2006

12/2006

3/2007

Return on assets

7.6%

7.9%

8.1%

8.2%

8.4%

8.7%

Return on equity

24.7%

26.5%

26.6%

28.4%

30.6%

31.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
These improvements are happening while Oracle (Nasdaq: ORCL  ) and SAP AG (NYSE: SAP  ) keep claiming ever-greater market shares in the important middleware arena. It's the amazing never-ending pie -- eat as much as you want, because the whole pan is growing faster than you can cut slices from it.

All kidding aside, software products and services add some hot and spicy growth to an otherwise stolid but secure revenue base from hardware sales, financial services, and third-party support contracts. Better still, IBM is enjoying its worldwide reach these days, since a weakening dollar has boosted profits in every division by a couple of percentage points over last year.

All in all, IBM falls somewhere between the rocketing growth of smaller players like TIBCO (Nasdaq: TIBX  ) or Red Hat (NYSE: RHT  ) and the supreme security of multi-industry conglomerates like GE or Berkshire Hathaway (NYSE: BRK-B  ) . Business infrastructure never goes out of style, and that's what really drives the blue monster these days.

Berkshire Hathaway is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. If he joined the Blue Man Group, he'd be Big Blue, too. You can check out Anders' holdings if you like, and Foolish disclosure looks good in any color.


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