A: The basics
Third-quarter revenue rose 9%, and earnings, before a one-time charge for pensions, jumped 12%.
Revenue was strong across all industry segments. Geographic results, however, were mixed. Adjusted for currency, Europe/Middle East/Africa revenue was flat, while the Americas (the largest segment) led with a 7% increase. There was 30% revenue growth in the emerging markets of China, India, Russia, and Brazil.
Gross profit margins rose from 36.3% in the third quarter of 2003 to 36.9% this quarter.
Global Services (49% of revenue), which include outsourcing, consulting, and maintenance, ended the quarter with a backlog of $110 billion.
The backlog bodes well for future business, and the overall performance shows that IBM products are in demand.
B: The balance sheet
Since the end of 2003, cash increased 26.5%, inventories declined 12.3%, and debt fell 7.1%. That's great performance -- and that's all that needs to be said.
C: The technology
Research and development (R&D) spending is 6.1% of revenue -- that's $1.4 billion for the latest quarter. That percentage of revenue compares favorably with the 4.6% at Hewlett-Packard
IBM is not underfunding R&D. Consider that services, a large percentage of IBM's revenue, skew percentage-of-revenue comparisons unfairly. Consider too IBM's impressive array of technology includes more than 700 nanotechnology-related patents and the world's fastest computer. Besides, how do you compare R&D spending results other than with sales -- and those are just fine.
Adding A + B + C
IBM, with growing sales, an improving balance sheet, and an adequate level of technology investment, sells for a modest 17 times 2005 earnings -- yet the stock is trading at the same level it was 52 weeks ago. IBM the company is hardly overlooked. IBM the stock is unloved (for now) but building value.
Want to learn more about R&D? Check out Ruminations on R&D by Ben McClure.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.