Foolish Forecast: IBM Will Rock for Ages

IBM (NYSE: IBM  ) reports third-quarter earnings tonight across the usual news wires, because no earnings season's Tech Week would be complete without Big Blue. With the "Who, What, When, Where, Why" rundown out of the way, let's have a look at the giant's prospects.

What Fools say:
Here's how IBM's CAPS scoring rates against some of its peers and competitors:

Market Cap (billions)

CAPS Rating

Bull Ratio

IBM

$160.3

***

86%

Oracle (NASDAQ:ORCL)

$113.0

****

91%

Accenture (NYSE:ACN)

$23.7

*****

96%

BEA Systems (NASDAQ:BEAS)

$7.2

***

90.3%

TIBCO Software (NASDAQ:TIBX)

$1.6

***

94%

Data taken from Motley Fool CAPS on 10/16/2007.

More than 1,500 Fools have weighed in on IBM, dragging the stock out of the two-star cellar a couple of months ago. One player notes, "Chinese, Indian, and Russian Government agencies and even NGOs [non-governmental organizations] will be favoring IBM for giant contracts to carry out continuous upgrades and automation in the next 5 years now that IBM has built a strong infrastructure in these countries." Global growth is a recurring theme in the bullish comments here.

The bears have been silent since July, and even then their concerns were focused on the very short term -- "OK for long run buy and hold, but over the next few weeks it will underperform," for example.

What management says:
In the last earnings call, CEO Sam Palmisano said that he likes the first half of the year and how those results positioned IBM to meet its long-term objectives. That includes delivering $11 of earnings per share in fiscal year 2010. To get there, IBM needs to grow EPS by around 19% every year.

What management does:
IBM spent the last couple of years reshaping itself, getting out of business lines it didn't want anymore. That's what's behind those negative revenue growth numbers below. Those days are over now, and Big Blue is back to becoming bigger and bluer. A new, leaner business mix and good old-fashioned fiscal discipline have added up to healthy double-digit earnings growth, and a generous share buyback program on top of that makes value investors feel cozy and warm.

Margins

3/2006

6/2006

9/2006

12/2006

3/2007

6/2007

Gross

40.9%

41.4%

41.7%

41.9%

42.1%

42.2%

Operating

13.7%

14.2%

14.3%

14.3%

14.4%

14.4%

Net

9.3%

9.5%

10.2%

10.4%

10.4%

10.4%

FCF/Revenue

13.5%

12.9%

12.2%

11.6%

11.2%

12.0%

Y-O-Y Growth

3/2006

6/2006

9/2006

12/2006

3/2007

6/2007

Revenue

(8.4%)

(8.0%)

(5.1%)

0.3%

4.4%

7.0%

Earnings

10.0%

10.6%

20.4%

17.8%

15.2%

15.7%

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:
IBM spent $14.6 billion on its own shares in the second quarter. Think about that for a second. These days, everyone is oohing and aahing over Oracle's bid for BEA Systems and chastising Google (Nasdaq: GOOG  ) for spending too much on unproven businesses. But the BEA bid is "only" worth $6.6 billion today, and YouTube cost less than $2 billion, all told.

Whenever Larry Ellison has some extra billions sloshing around in his corporate coffers, the guy goes shopping for acquisition targets. Palmisano, on the other hand, goes out and borrows money to invest in his own business instead. I think IBM will let Oracle have BEA at whatever price it can, and just keep chipping away at internal growth and smaller acquisitions.

More big, blue Foolishness:


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