With IBM, Boring Is a Reason to Buy (UPDATE 1)

Updated from 12:31 p.m. ET to reflect IBM's third-quarter report, after-hours action

ARMONK, New York. ( TheStreet) -- IBM ( IBM) has become an attractive prospect for investors looking for certainty in a fickle economy.

Although not a glitzy gadget maker in the style of Apple ( AAPL) or a funky Internet stock a la Google ( GOOG), IBM's vast software and services divisions offer consistently stable revenue streams, helping insulate the firm against economic unease.
IBM reports its third-quarter results after market close.

"While we contend that IBM is by no means a 'growth' company, it is leveraged to several broader macro trends occurring in the technology industry, including a growing shift in client demand away from point products and toward integrated solutions," explained Brad Zelnick, an analyst at Macquarie Capital, in a recent note.

The company, he adds, should be able to deliver sustained earnings per share growth between 10% and 12%, regardless of what happens in the broader economy.

After Monday's closing bell, IBM posted a non-GAAP profit of $4 billion, or $3.28 a share, on revenue of $26.16 billion, up 8% year-over-year. The performance bested the average estimate of analysts polled by Thomson Reuters for a profit of $3.22 a share in the September-ended period but fell slightly short of the top-line consensus view for revenue of $26.27 billion.

Investors had pushed IBM's stock to a new 52-week high of $190.53 last week, so even the small miss was enough to spark some selling in the shares, which lost 3.7% to $179.70 in Monday's after-hours action, according to Nasdaq.com, with volume reaching 1.4 million.

Still, the results continued to underline the Armonk, New York.-based company's successful shift of its focus away from low-margin hardware onto higher-margin businesses such as software and services. In the latest quarter, software revenue rose 13% year-over-year to $5.82 billion, while revenue from global technology services rose nearly 9% from last year to $10.32 billion. Gross margins came in at 88.1% and 35.7% for the respective businesses, while revenue from systems and technology increased 3.6% year-over-year to $4.48 billion.

The most notable change for IBM in the past decade was the sale of its PC business to Lenovo back in 2004, which laid the foundation for a headlong push into more lucrative areas such as data analytics and cloud computing. Tellingly, rival HP ( HPQ), keen to emulate IBM's success, is now deciding whether to spin off its own PC business.

"IBM's history of divesting commoditizing businesses and strengthening its position through focused organic investments and acquisitions in higher-value segments have positioned it well," noted Macquarie's Zelnick.

IBM CFO Mark Loughridge said Monday in prepared remarks for the company's conference call that IBM was lifting its operating earnings per share outlook for 2011 to at least $13.35, an increase of 10 cents from its previous view.

He called this a "good start toward our 2015 roadmap," which is a projection for operating earnings per share to reach at least $20 by 2015. The company has also said it expects growth markets to account for 30% of its total revenue by that time.

The after-hours decline in the stock aside, IBM still seems to firing on all cylinders, and this initial reaction may have more to do with taking some profits in a nervous market given the stock's year-to-date gain of more than 25%. The shares have a forward annual dividend yield of 1.6%, and a reasonable forward price-to-earnings multiple of 12.7X, so they won't be able to pull back too far before starting to look at attractive.

The revenue miss is slight but it's likely being viewed through the context of IBM delivering upside of 2.5% and 5.2% on the top line in the first two quarters of fiscal 2011.

-- Written by James Rogers in New York.

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