Two Prime Blue Chip Growers

04/02/2008 12:00 am EST

Focus: STOCKS

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Stephen Biggar, global director of equity research at Standard & Poor’s, finds two big-name multinational companies he thinks will continue showing strong growth this year.

We think IBM (NYSE: IBM) is making good progress toward its goal of generating earnings of $10 to $11 a share in 2010. Though we expect growth in information technology (IT) spending to slow in 2008, we project IBM will increase revenues by 5% in 2008 and 7% in 2009.

We expect sales to increase in all segments: computer hardware, software, and services. The company’s expanding presence in emerging market economies should help support growth, even if the market for its services in the US wanes. We expect margins to expand, given greater economies of scale.

On March 12th, we reiterated our Strong Buy recommendation after IBM announced it would acquire Encentuate, a privately held provider of identity and access management software. We found this deal to be in line with what we view as positive trends toward expansion of software operations that typically carry high margins and penetration of promising overseas markets.

For 2008, we forecast earnings of $8.25 a share, which is at the bottom of the guidance IBM provided on February 26th, [when] it announced a $15-billion stock buyback program. We estimate earnings of $9.30 for 2009.

Our 12-month target price of $140 is 17x our 2008 earnings estimates, at the low end of IBM’s historical range, and reflects our expectation of modest growth in IT spending. (The stock closed above $116 Friday—Editor.)

We [also] think Nike (NYSE: NKE) is on track to gain market share with help from recent acquisitions and by penetrating new categories and the global market. Nike’s fiscal third-quarter earnings attested to strong brand momentum, as the Nike brand captured an additional three market-share points, to hold 40% of the US active-footwear market.

Internationally, the acquisition of the number-one soccer brand in the world and this summer’s Beijing Olympics should increase brand awareness, share, and profits. Additionally, accelerated store openings and growth in women's and other businesses should help Nike reach its revenue goal of $23 billion by fiscal 2011 (ending May).

We see a significant opportunity in the women's footwear and sports apparel markets, as sales to women represent only about 20% of Nike brand sales. The company recently launched key marketing and sales strategies to more closely align it with its key markets, and early results appear promising.

In the past two years, Nike more than doubled its dividend and repurchased approximately $1.8 billion of its shares. Its nearly $3 billion in cash and short-term investments and its dominant global brand with exceptional international growth opportunities support our Buy recommendation.

Our 12-month target price of $78 is 20x our fiscal 2009 estimate of $3.90 a share, in line with Nike’s historic forward multiple. We expect Nike to earn $3.65 for fiscal 2008.
(The stock closed Tuesday below $70—Editor.)

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