IBM: Shift to Growth?

12/18/2014 7:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Our latest recommendation has a long history of drifting in and out of investor favor, mainly due to fear that new technologies will put it out of business, observes Pat McKeough, editor of TSI Network.

International Business Machines (IBM) has long history of shifting out of slowing businesses into faster-growing fields.

It is now selling its low-end server business and will invest the proceeds in areas with better long-term potential, such as cloud computing and analytics software.

In addition, IBM’s well-known brand and global salesforce continue to give it a big advantage, particularly in developing countries.

The company now gets 55% of its revenue by designing computer systems and managing them for business and government clients. It typically does this under long-term contracts, which cuts its risk.

In the past few years, IBM has aggressively expanded its software business. It’s particularly interested in analytics software, which helps clients gather and analyze a wide variety of data. Software now supplies 27% of IBM’s revenue.

The company’s computer hardware business, which accounts for 14% of its revenue, continues to shrink.

Now it is selling its computer chip manufacturing operations to Globalfoundries; indeed, IBM will pay $1.5 billion to Globalfoundries to take over this money-losing business.

While the sale of its chip business helps IBM focus on its more-profitable computer services and software divisions, many of its corporate clients are spending less on new computers as the global economy slows.

That’s mainly why IBM’s revenue in the third quarter of 2014 fell 4.0%, to $22.4 billion from $23.3 billion a year earlier. Earnings fell 18.1%, to $3.7 billion from $4.5 billion, while earnings per share declined 9.8%, to $3.68 from $4.08, on fewer shares outstanding.

IBM now expects that it will earn $16.15 a share in 2014, down from its earlier forecast of $18.00. The stock trades at just 10.0 times the new estimate.

However, IBM’s strategy should spur its earnings as the economy rebounds. As well, the $4.40-a-share dividend seems safe and yields 2.7%. IBM is a buy for long-term gains.

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