BOSTON (TheStreet) -- IBM (IBM), known as Big Blue, is among the most storied U.S. companies. The original "business machine manufacturer" pioneered computing and, then, in the 1990s, as it lost hardware market share to the likes of HP (HPQ), Dell (DELL) and Apple (AAPL), it reinvented itself as a global technology consultant.Management, led by current CEO Sam Palmisano, has proven to be forward-looking, nimble and, more importantly, dedicated to rewarding shareholders. IBM's stock has returned 14%, annualized, since 2008, third best of the 30 Dow equities.
Another standout attribute is IBM's return on equity, the critical measure of profitability for stock holders. The metric expanded to 64% in the latest quarter from 59% in the year-earlier period, exceeding the industry average of 53% and the S&P 500 average of 14%. IBM has goosed returns by using debt financing. It held nearly $29 billion of long-term debt at quarter's end, for a debt-to-equity ratio of 1.2. It has also been buying back stock, boosting shareholders' per-share earnings. The float fell 5.9% to 1.2 billion shares in the fourth quarter. Leverage and buybacks haven't damaged the balance sheet. IBM has $12 billion of cash. IBM's commitment to shareholder returns has impressed equity analysts. The stock receives 18 "buy" recommendations and 13 "hold" calls from brokerages. It doesn't have a single "sell" rating. That aggregate score places the stock seventh in the Dow 30 for sentiment. However, with earnings season looming, it might be best to wait until after IBM's report, due April 19, to initiate a position. IBM's stock has dropped in response to five of its past six quarterly earnings reports, despite beating the consensus profit estimate for each period. Analysts forecast first-quarter earnings of $2.30, up 18% year-over-year, and sales of $24 billion, up 5.1%. Fourth-quarter results were bolstered by overseas growth, a trend expected to persist over the long-term as emerging markets implement technology systems already ubiquitous in Western economies. IBM, as the leading tech consultant for businesses of various sizes, is a direct beneficiary of this trend. Geographically, IBM has leverage to Asian growth, generating 23% of its 2010 sales in the Asia Pacific region, 32% in Europe, the Middle East and Africa and 42% in the Americas, with 36%, specifically, from the U.S. It derived $56 billion, or 57%, of 2010 revenue from its services division, compared to 23% from its software unit and 18% from systems and technology. Management is optimistic about growth through 2015, having recently forecasted $20 a share of earnings for that fiscal year, equivalent to a price-to-2015-earnings multiple of just 8.2. JPMorgan, which has an "overweight" ranking and $166 price target on the stock, believes IBM is in a unique situation as a "one-stop shop" for technology services and other large-cap tech competitors will be tempted to make large acquisitions, and potentially disrupt cash flow, earnings and operational efficiency, in order to diversify offerings amid elevated cash balances. IBM, on the other hand, has no need for a major acquisition and will continue to purchase pint-sized, easily-integrated companies, without altering its business model.
The name of the game in tech is cloud computing and IBM has an outstanding cloud franchise already, estimating $3 billion of incremental revenue growth from cloud through 2015. It also sees so-called smarter planet, its pro-environment, energy-efficient infrastructure and analytics platform, offering $7 billion of incremental revenue. Its core business analytics and optimization will thrive as the global economy integrates and expands. JPMorgan sees upside to the 2015 $20 EPS estimate, with upward pressure on IBM's margins as "servers, storage and networking take on increased importance in data-center-efficiency projects." IBM's stock currently trades at a trailing earnings multiple of 14, a forward earnings multiple of 11, a sales multiple of 2 and a cash flow multiple of 10, discounts of up to 40% to IT-services-industry averages. Perhaps the greatest value driver for IBM isn't easily modeled by researchers. Its patent portfolio has nearly doubled to 5,090 since 2005, and it spends roughly $6 billion annually, or 6% of total revenue, on research and development, a hefty percentage.
-- Written by Jake Lynch in Boston.
Become a fan of TheStreet on Facebook.