Choosing between IBM
In the end, we chose Microsoft. It was a close race, though. How close? We're glad you asked.
Prospects/Growth (advantage Microsoft): Despite a few product flops, Microsoft increased sales nearly 7% year over year, while IBM's sales were flat. In fact, IBM has only grown sales at 0.2% compounded over the past five years, versus Microsoft's 9.4%. Yes, this is backward-looking, but we think the combination of Microsoft's Word and Office legacy platforms, in addition to its prospects in mobile and cloud computing, will keep Microsoft growing at a steady pace in coming years.
Execution (advantage IBM): It isn't too harsh to compare the execution of Ballmer & Co. to a brick off the back of the rim. Perhaps it's too busy fending off antitrust lawsuits or counting its cash, but Microsoft has never been able to progress from concept to launch with as much zeal and panache as a company like Apple
Look no further than its recent business performance. When the company announced its goals for 2010 way back in 2007 (the cherry on top was to grow EPS from $6 to $9), the Street laughed. They were right to, but not because IBM couldn't hit the mark. IBM earned EPS of $10.12 in 2009. A buck more and a year ahead of schedule.
Stewardship (advantage Microsoft): We liked that Microsoft has split chairman (Bill Gates) and CEO (Steve Ballmer) roles. This allows the chairman to schedule and set the agenda for board meetings without direct interference from the CEO, and helps keep the board independent from the executive suite. Also, Microsoft issues restricted stock grants, rather than employee stock options. This is a good move for a number of reasons, including reducing the shareholder dilution brought on by option issuance.
Risks (advantage IBM): Big Blue gets the nod here for its proven ability to play offense. IBM was referred to as "corporate Play-Doh" in last week's article because of the company's willingness and ability to change its course. Microsoft stands in stark contrast in this regard -- always playing defense. Heck, its nickname is "Mr. Softy." With cloud computing as a shared threat, and the financial wherewithal to mount an attack a non-issue for either tech giant, when it comes to survival, we'd rather play offense than defense.
Valuation (advantage Microsoft): In last Monday's article, Bryan found that IBM's fair value was roughly 10% above the current market price, whereas I (Todd here) think Microsoft is closer to 20% undervalued. Given Microsoft's rock-solid balance sheet, and the fact that investors are already quite bearish, we think the downside risk/upside potential trade-off favors Microsoft.
Bottom line: Microsoft edged out IBM, 3 to 2.
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Neither Todd nor Bryan owns shares of any company mentioned ... but they will soon be owners of Microsoft via their shiny, new DSP/DRIP accounts! Microsoft is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.