A Turnaround for Big Blue?

06/10/2013 6:30 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Although quarterly results were disappointing, there's still life in this old blue-chip company, says Pat McKeough of TSI Network.

IBM (IBM) started up in 1911, which makes it the world's oldest computer company. Today, it operates in more than 170 countries.

The company reported lower-than-expected earnings and revenue for the latest quarter. In the three months ended March 31, the company earned $3 a share before one-time items, up 7.9% from $2.78. The gain was mainly the result of IBM's ongoing efforts to cut costs and improve productivity. Even so, the latest earnings missed the consensus estimate of $3.05 a share.

Revenue fell 5.1%, to $23.4 billion from $24.7 billion. That also fell short of the consensus estimate of $24.6 billion. IBM gets two-thirds of its revenue from overseas. If you adjust for foreign-exchange rates, overall sales would have declined by 3%.

Businesses continue to put off signing deals for new computers and related services due to the uncertain economy. At the same time, IBM may sell more of its hardware operations. That would give it additional cash to expand its more profitable software business, which will probably supply half of IBM's earnings by 2015.

IBM also continues to work on advanced technologies that may take years to bring to market. These include quantum computing systems that would be much faster than current machines. It's also developing ways to store information on just a few atoms. This would greatly expand a computer's capacity.

The company still expects to earn at least $16.70 a share in 2013. The stock trades at just 12 times that estimate.

At one time, IBM appeared to be stagnating and falling behind newer and more energetic tech stocks. But it remade itself from a company known for its computer hardware to one focused on analytics and advanced technologies.

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