Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Why IBM Is Strong No Matter Which Way the Economy Turns

By

Its revenue from emerging markets and potential for long-term contracts make it viable for any portfolio.

PrintPRINT
These days, investors are debating whether the glass is half empty or half full. Some are seeing the first signs of genuine economic recovery. Others warn that we should hold on tight for a second plunge in the midst of a double-dip recession.

Your view of things will determine the kinds of stocks you put your money into. Believe that things are going to get better? You may want to load up on shares of riskier companies with plenty of operating leverage to position them for takeoff as things turn around. See things from the dark side? Consider defensive stocks that can maintain earnings and deliver dividends even if things take a turn for the worse.

Personally, I can't decide which way things are headed. So, I'm looking for high-quality stocks that have room for growth but will also gain from the market's desire for safety. IT and computing's 10,000-pound gorilla, International Business Machines (IBM) is a stock that's in my line of sight. Here's a quick run down on why IBM looks attractive in either scenario.

Let's say the world economies stage a comeback. IBM will be a major beneficiary. The company is no longer burdened by its money-losing hard drive business or its low-margin PC business. Today it's focused on high-margin software and services, where there's plenty of opportunity for IBM because, despite being the top player, it holds less than 8% of the market. Meanwhile, a bigger and bigger portion of its revenue is coming from faster-growing emerging markets such as China, India, and Brazil. Technology market researcher IDC reckons emerging markets will grow a whopping 8% to 13% this year.

Thanks to its global brand and world-class reputation for quality, IBM will surely be at the head of the pack when it comes to grabbing government stimulus-backed technology infrastructure spending programs. Moreover, an improved economic climate may have IBM seeing stronger-than-expected service signings and software revenues as big deals that clients postponed last year now start to close.

And what if global growth stays sluggish? IBM investors get the stock market equivalent of the Rock of Gibraltar. Software and services translate into long-term contracts that deliver annuity-like payments, helping to ease roller-coaster revenues suffered by Dell (DELL) and even Hewlett-Packard (HPQ).

IBM delivered more than $5 billion in free cash flow in the most recent quarter, and analysts expect about $16 billion worth of free cash in 2010, giving it plenty of cushion to raise its dividend from $0.55 per share. Remember, IBM has raised its dividend annually for the last 14 years. The company is sitting on more than $13 billion in cash and uses only 20% of cash flow to fund its dividend. If the market turns down, investors will be drawn to IBM's safe haven features.

In any case, the shares look undervalued. Despite double-digit earnings projected for 2010, a hefty 10% free cash yield, the stock trades at just 10.5 times earnings and seven times enterprise value/EBITDA. It's hard to make out downside from this point, while there's substantial upside to be had once buyers start opening their purse strings.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE