IBM: The Good, the Bad and the Ugly

International Business Machines(IBM Quote) is a stalwart of the American corporate landscape. But it has mixed prospects as an investment.

The good: The company is a survivor of numerous economic downturns, and the current malaise offers executives the potential to wring out efficiencies from processes that, like many businesses in the go-go days earlier this decade, may have become bloated. So IBM may become more efficient. The company has excellent fundamentals and displays high quality in its metrics, such as return on equity (averaging 30% over the past 10 years) and wide and consistent margins (averaging around 40%, 13% and 9% for gross, operating and net margins, respectively). IBM is a perennial favorite with both institutional and private investors.

The bad: Despite its strengths and storied history, IBM is as susceptible to economic woes as any other company, which has been borne out in the past two recessions, in 2001 and in 1990. In the early 1990s, the company posted losses. However, IBM rebounded in both cases and will do so again.

The ugly: This may be the ugliest recession that IBM has ever faced. The current economic situation is so bad that it is frequently compared to the Great Depression. Today's turmoil is spread across industry sectors and international boundaries. It is a global meltdown of significant magnitude. Big Blue will be sorely tested, and its share price is almost certain to fall, as it did in 2001 and 1990.

That said, the past performance of IBM's stock is of no real importance when looking out two or three years. The reality is that there is a budget freeze in nearly every type of corporation around the planet, despite IBM management's assertion that long-term contracts will uphold margins. It may take considerably longer than a year for corporations to come back on line for IBM's products and services. So it's difficult to believe management's upbeat forecasts. History points to Big Blue as recession-sensitive.