7 Reasons To Buy IBM

| About: International Business (IBM)

International Business Machines Corporation (NYSE:IBM) creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a client’s operational costs or by enabling new capabilities that generate revenue. These solutions are draws from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.

The company’s global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company’s clients. Clients are served through five business segments: Global Technology Services, Global Business Services, Software, Systems and Technology and Global Financing.

IBM is currently trading with a P/E of 15 and a stock price of $184. At current levels, I would not consider the stock to be cheap, nor expensive. Any investor taking a long term approach should consider IBM for his or her portfolio. Below 7 reasons why IBM is a great long-term buy.

1. Consistent & stable EPS growth

In the last 10 years IBM has grown EPS from $4.35 in 2001 to $11.52 in 2010. Including in the 2008 – 2009 crisis period IBM was able to grow EPS. For 2011, IBM is on the way to earn more than $12 per share. There are not many companies that can grow earnings in such a stable and consistent way. Graph 1 shows the trend over the last 10 years.

Graph 1: 10 year EPS trend

2. Shareholder friendly

Huge amounts of cash have been returned to stakeholders in the last 10 years. On average $10 billion annually has flown back to stakeholders through stock buy backs and dividends. This is more than 85% of the free cash flow generated during this period. Graph 2 provides an overview of the share buy backs and dividends.

Graph 2: 10 year buyback and dividend trend



What company was awarded the most patents in 2010? IBM’s 5,896 patents in 2010 were the most U.S. patents ever awarded to one company in a single year. Over 70 percent of the patents issued in 2010 were for software and services. The company’s investments in R&D also result in intellectual property (NYSE:IP) income of approximately $1 billion annually.

4. Aggressive margin expansion

IBM has grown revenue from $85 billion in 2001 to almost $100 billion in 2010. Slow, but stable revenue growth. More impressive is that the company repositioned the product and service mix to generate much higher profit margins. In the same period net income has doubled from $7.7 billion to $14.8 billion. Graph 3 gives the 10 year revenue and profit trend.

Graph 3: Revenue and profit trend

5. Strong cash flow generation

Operating cash flow in the recent years has been around $20 billion. IBM doesn’t require much cash to maintain operations and grow. Approximately 75% of the operating cash flow is turned into free cash flow (graph 4). I am expecting a higher inflationary environment in the coming years. Companies that have low capital requirements will outperform.

Graph 4: 10 year operating and free cash flow trend

6. High margins and ROE

IBM’s margins are impressive. Gross margins in 2009 and 2010 have been above 45% and EBIT margin is close to 20%. The return on equity is 70%, double compared to 10 years ago. This is mainly due to a doubling of net income, while equity remained stable at $23 billion. Earnings have flown back to shareholders (see point 2) and used to acquire over 100 companies, complementing and scaling the company’s portfolio of products and offerings.

7. Solid balance sheet

The balance sheet is solid. Debt stands at approximately $28 billion. Cash is around $11 billion and equity at $23 billion. I get careful when debt is more than equity. In IBM’s case this is not a major concern. The company has great earning power. It generates more than $15 billion in free cash flow. The current debt level is equal to cash and 1 year of free cash flow.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IBM over the next 72 hours.