IBM: Buy Big Blue To Put Some Green In Your Portfolio

| About: International Business (IBM)
This article is now exclusive for PRO subscribers.

IBM (NYSE:IBM) may not be as glamorous or new as Google, VMWare, Salesforce, or any other number of tech upstarts. But what IBM does have is a track record, and we think that a company we can know for certain will be around for the forseeable future is a company worth investing in. IBM has been in the Dow Jones Industrial Avergae since 1979, and was present up until 1939 as well. In an industry where most tech companies' life-spans measure in years, IBM's is measured in generations. Founded in 1911, IBM has a century of operating history under its belt, and it has much farther to go.

What makes IBM appealing to us is the fact that 41% of IBM's operating income comes from the services division, which is far more recurring in nature than other segments. This annuity-like income stream provides IBM with a cushion in economically distressed times. And in the last quarter, Global Services constituted 44% of pre-tax net income. IBM is a defensive play, something we rarely see in technology. But IBM is growing fast as well, which is the traditional reason people invest in the technology sector. The Asia/Pacific region accounts for nearly a quarter of IBM's revenue, and IBM's backlog, a measure of future revenue, was up $15 billion last quarter to $144 billion.

We see IBM as not only a secular play on global technology trends, but also as a play on growth in emerging markets, on two fronts. IBM is not only growing revenue and profits faster in emerging markets, but those profits are also taxed at a lower rate. So in effect, IBM's overall profit is boosted even more, since it will be earning more and playing less in taxes. Given all the political hostility in Washington, we do not see the political will to meaningfully alter the corporate tax code. So, what will IBM do with all that cash?

We will not shy away from the fact that IBM's balance sheet is not as clean as we would like it to be. While IBM does have nearly $12 billion in cash, it also has nearly $30 billion of debt. But should this be of concern to either an exisitng investor, or a perspective investor? Not in our minds. IBM may have more debt than cash, but its enormous free cash flow allows for investors and creditors of IBM to rest easy.

IBM has clearly been very active on all capital allocation fronts, including share repurchases, dividend increases, and M&A. It should be noted that although stock buybacks may have dipped in the recession, the dividend did not, which we see as a sign of true cofidence from management. Despite increasing 108% over the last 5 years, IBM still trades at a P/E ratio of just under 14, a discount to its historical average, and a forward P/E of 12.

IBM encompasses all the elements we like to see in a company. It is both stable and growing, and not only pays dividends and buys back stock, but also makes acquisitions when the time is right. IBM is a company that may be growing more slowly than others, but when you see how steady that growth is, we think you will be impressed. If you would like some green in your portfolio, we suggest looking at Big Blue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. A mutual fund we own gives IBM a 1.23% weighting