Why IBM Is a Buy Now

Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's an overdue look at IBM (NYSE: IBM  ) , Fool style.

Foolish facts

Metric

IBM

CAPS stars (out of 5) ****
Total ratings 4,016
Percent bulls 90%
Percent bears 10%
Bullish pitches 516 out of 590
Highest rated peers CACI International, Integral Systems, Telvent GIT

Data current as of Dec. 29.

For many Fools, Big Blue is the bluest of Blue Chip stocks. IBM generates nearly $100 billion in global revenue annually and routinely leads all American tech outfits in patents awarded. And for as many headlines as there are devoted to the rise of Indian outsourcing companies, IBM's tech services group produces 3.3 times as much revenue as Wipro (NYSE: WIT  ) and Infosys (Nasdaq: INFY  ) combined.

"Few companies have the scale to put together teams with a sufficiently wide range of expertise to create custom large-scale enterprise-computing solutions. Furthermore, unlike Oracle (Nasdaq: ORCL  ) or Microsoft (Nasdaq: MSFT  ) , IBM is not irrevocably wedded to any particular hardware or software -- they are very well positioned to build on emerging cloud resources," wrote Foolish investor pbkirk last week.

Looking back to look forward
History lends credence to his pitch. Technical breakthroughs and the growing demand for infrastructure were common themes in this year's IBM coverage at Fool.com:

  • In an attempt to defy Moore's Law, IBM in March teased a breakthrough that could allow light to replace electricity in semiconductors. A commercially viable version of the technology -- if introduced -- could be made to power a fully functioning computer with nothing more than a 1.5-volt battery.
  • In April, IBM reported a 16% earnings increase on flat revenue (after accounting for currency effects). Revenue from emerging BRIC countries rose 14% year-over-year, and IBM's System X blades took share from competitors.
  • The very next month, IBM bulked up its portfolio of infrastructure by spending $1.4 billion to acquire Sterling Commerce. The move increased Big Blue's supply chain management capabilities and in the process put the company in closer conflict with Oracle and SAP (NYSE: SAP  ) .
  • By July, developers had recognized Big Blue for its cloud computing services even as the European Commission investigated whether illegal tactics allowed the company to dominate the mainframe market. Meanwhile, Foolish colleague Brian Hinmon focused on the effect of that dominance -- i.e., tens of billions in free cash flow -- and recommended the stock for the Fool's DRIP portfolio.
  • Two months later, our team decided that IBM's dividend and share repurchase policies were mere bonuses. Big Blue was a buy outright. "IBM's business model is effective. In fact, it's so effective that we're now seeing Oracle, Hewlett-Packard (NYSE: HPQ  ) , and Dell all taking steps to copy it," wrote Foolish colleague Eric Bleeker in announcing the purchase.
  • In October, IBM did what it always does: deliver a solid, expectations-beating earnings report. Mr. Market barely noticed.
  • Not much changed in the final two months of the year, and the stock ended up a little more than 12% and slightly behind the index. This in spite of noticeable technical advances in key areas, such as solid-state storage. No one on the Street believed Big Blue's ambitions were reasonable despite years of fundamental outperformance.

But don't take my word for it. Have a closer look at the numbers:

2010 Quarterly Performance

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Revenue growth

5.3%

2%

3%

6.6%

Normalized net income growth

12.5%

5.6%

5.5%

12.2%

Gross margin

43.6%

45.6%

45.3%

49%

Return on capital

18.6%

23.8%

24%

34.5%

Source: Capital IQ, a division of Standard & Poor's.

More galling is that Wall Street is unwilling to buy yet still expects a lot from IBM over the next two years, according to data compiled by Capital IQ:

Capital IQ Estimates

2011

2012

Revenue estimate

$104,229 million

$109,249

Normalized profit per share estimate

$13.08

$14.42

Source: Capital IQ. Data current as of Dec. 29.

Foolish outlook: bullish
IBM is living up to those expectations. Just this week, Big Blue reported a 16% increase in per-share earnings and a 7% gain in revenue after accounting for currency effects. Executives also said they expect at least $13 in Non-GAAP earnings per share during the year ahead, which for conservative IBM means upside is likely.

Now it's your turn to weigh in. What do you think of IBM's prospects at current prices? Use the comments box below to explain your thinking. You can also join me in rating IBM in Motley Fool CAPS.

What will be this year's best stock? The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here – it's free.

Interested in more info on the stocks mentioned in this story? Add IBM, Hewlett-Packard, Infosys Technologies, Microsoft, Oracle, SAPor Wipro to your watchlist.

Microsoft is a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers purchase a diagonal call position in Microsoft. The Fool owns shares of International Business Machines, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of IBM, Microsoft, and Oracle and is also on Twitter as @TheMotleyFool. When it comes to stocks, the Fool's disclosure policy is a lookie-loo.


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