Cover Story: The New IBM by Leslie P. Norton
Highlighted companies: International Business Machines Corp. (IBM), EMC Corp. (EMC), Microsoft Corp. (MSFT), Dell Inc. (DELL), Hewlett-Packard Co. (HPQ), Citigroup Inc. (C), Sun Microsystems Inc. (SUNW), Siemens AG (SI), Accenture Ltd. (ACN), Infosys Technologies Ltd. (INFY), Wipro Ltd. (WIT), SAP AG (SAP),
Summary: Barron's cover story takes a bullish stance on International Business Machines Corp. (IBM). CEO Samuel Palmisano, who few thought would radically part ways with his predecessor Louis Gerstner when he took over in 2002, is doing his best to reinvent the giant and transition it from a hardware/mainframe focus to a middleware producer which can make big dough with its exceptional software margins (85%), followed-up with client services. Some key points:
Palmisano: "We have a top share in servers and Linux, No. 1 in blade servers, which is a huge growth area... No. 1 in supercomputing, No. 1 in SOA... We're No. 1 in middleware... IBM is a stronger company today than it was four years ago, with stronger margins, solid cash and earnings." Barron's: You don't need a computer to know what that trend could do for IBM's shares.
- 2006 earnings are expected to grow 12%, and 2007 by another 9% ($5.98 and $6.54).
- Shares trade at 15x earnings vs. 25x for EMC Corp. (EMC), 23 for Dell Inc. (DELL), and 20 for Microsoft Corp. (MSFT).
- Its $10b cash on hand can be and has been used to boost earnings through swallowing up smaller software companies and speculative investments such as last month's Citigroup Inc. (C) partnership in China's Guangdong Development Bank.
- A decade ago most IBM software ran on its mainframes. Today it's the world's largest middleware vendor through brands WebSphere, Lotus, Tivoli, Rational and DB2 brands. Its legacy software, such as the operating systems for IBM mainframes and servers, "don't blow anyone's doors off," but are still big money makers.
- Its middleware helps companies implement "Service Oriented Architecture" [SOA], a buzzword for the growing trend to make computer systems more flexible and adaptable to changing business needs. IBM sells over 3x more SOA products and services than anyone else.
- Its traditional services department has been hit by competition, particularly Indian rivals which low-cost services. IBM has restructured its service unit, and plans to invest $6b in India, possibly acquiring another firm to go along with its purchase of outsourcing company Daksh. This quarter IBM won a $300 million contract with Scotland's public health service, an $863 million deal with the State of Texas, and is expected to sign a 10-year $8.45 billion contract with Siemens AG (SI) to modernize technology for the German military.
- Its "cash-cow hardware division keeps ticking," with Q3 growth up 8.8% (versus 5% in 2005) from higher mainframe revenues and gains in IBM's Technology Collaboration operation.
- IBM processors are at the core of all major videogame consoles, including Sony's (SNE) new PlayStation 3. Bob Djurdjevic of Annex Research predicts that Technology Collaboration, its R&D and semiconductor-design unit, "will become so large that it deserves comparison to IBM's shift to services several years ago."
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