IBM: In the Black and Positioned for Growth

Big Blue is in the black and positioned for growth given its focus on services and software and its industry leadership position according to a recent report by Standard and Poor's. The company's share price is trading cheaply and looks to go higher over the long term when IT spending recovers in 2010 and beyond.

IBM will see a 5% drop in revenues in 2009 but has managed to expand earnings per share through the industry downturn that started in 2008. That trend will continue over the next year says Thomas Smith, technology analyst at S&P who rates IBM a Strong Buy.

Hardware sales are still a big ticket item for IBM but have diminished greatly in importance from 24% of revenues in 2000 to only 9% of revenues in 2008. Software and service represented 82% of revenues in 2008 and those businesses are far more defensive because software updates and services are generally non-discretionary spends. Judging by the $126-billion order backlog in the Global Services Division, revenues and earnings have high visibility. That backlog, incidentally, was up from 2008 and represents more than total revenues in that year.

Cost cutting and a "richer product mix" will allow IBM to increase gross margins this year to 44.7% says Smith. Shares are trading at the low end of their valuation range and at 11.4 times trailing earnings which is a 22% discount to the S&P IT sector. Strong visibility and low valuations, therefore, make Big Blue a good bet.