Why I Still Believe in IBM

IBM (NYSE: IBM  ) crashed hard on Wednesday, taking the Dow (INDEX: ^DJI  ) along for the downward ride. There's a third-quarter report to blame for the slide.

Big Blue's earnings largely matched analyst expectations despite sales coming in a bit low. Bullish analysts mostly remained bulls after the report, but a couple of fence-sitters jumped off on the "sell" side.

So what's a regular Fool to believe? Is IBM's business chugging along according to plan, or have investors been assuming that Big Blue will hit unreachable targets?

Here's what I see.

Don't panic!
It's easy to freak out over IBM's falling revenue. Sales dropped 5% year over year, or 2% when adjusting for currency conversion effects. But you should keep a couple of mitigating factors in mind before hitting that "sell" button:

  • IBM sold its retail point-of-sale systems to Toshiba over the summer, reducing this quarter's sales by about 2% in a very direct way. The division was profitable, but lagged behind the tech titan's overall operating margins of roughly 20%. So IBM traded a $850 million pre-tax sale price for more robust hardware margins. Not a bad trade, if you ask me.
  • Stop me if you've heard this one before, but the global economy isn't exactly doing the cha-cha. IBM has chosen to drive margin improvements while top-line growth is stalled for reasons beyond the company's control. A less-disciplined company might have gone with deep-discount fire sales to prop up flagging revenue, and margins be damned. Accounting trickery can protect the bottom line from such abuse for a while, but look out below when investors start paying attention to cash flows instead. So that's another great decision by IBM's top brass.

CEO Ginni Rometty underscored this cash-efficient strategy herself: "We continued to drive margin, profit and earnings growth through our focus on higher-value businesses, strategic growth initiatives and productivity," she said.

Growth will return when the markets recover And yes, they will recover one of these days.

Current growth drivers
In the meantime, Big Blue is pulling some timely levers to make up for lost hardware sales: Currency-adjusted sales to the BRIC block jumped 11% year over year, business analytics (think big data) jumped 14%, and the Smarter Planet project is starting to make some real money.

Meanwhile, the competition is floundering. Hewlett-Packard (NYSE: HPQ  ) has been stuck in an eternal turnaround mode for several years, and has nothing to show for its efforts. Cisco Systems (Nasdaq: CSCO  ) may want to become the next IBM, but its systems and services sales remain a faint blip on IBM's radar, some three years after that project started. Oracle (Nasdaq: ORCL  ) might be the most credible head-to-head threat, and Larry Ellison never stops gloating over the market share he's stealing from Armonk. But his claims often ring hollow.

In the end, it all comes down to the shareholders' dollars and cents. That's where IBM really shines. Take a look at this chart and then tell me if you'd rather own IBM itself or one of its many wannabe clones:

IBM Total Return Price Chart

IBM Total Return Price data by YCharts.

Rometty took the reins to a fully functional, flying Batmobile and is steering it exactly where Sam Palmisano told her to go. And there's nothing wrong with that.

The fact that I think IBM is a superior stock doesn't mean that I've given up hope for all of its rivals. Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in our premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as their story changes, so click here now to read more.

Fool contributor Anders Bylund has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

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