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Published: August 30, 2010
Investors are always on the lookout for a
competitive edge. The ability to peer slightly into the future
is a key edge to exploit, be it company guidance for the next
quarter or analyst projections over the next couple of years.
But one company has gone a step further than most and has
provided an
earnings road map out to 2015 -- where it projects an
astounding $20 per share in earnings.
The first thing to note is the company sailed through the credit
crisis. A look at its financial results proves it had minimal
ill-effects from a housing bubble and credit crunch that sent a
number of erstwhile well-respected firms down in flames. Its
customer base was also hit, but it remained loyal.
The dot-com bubble was also only a slight inconvenience. The
technology-laden Nasdaq market officially peaked in March of
2000, and it only took the firm three years for sales to return
to 2000 levels and four years for profits to recover. The hit to
operations was also somewhat muted, with sales falling a little
more than -8% and profits dipping -15% at the peak of the
pessimism in 2002. Meanwhile, many smaller players ceased to
exist or were acquired from rivals on the cheap.
Downside protection is a very appealing quality for any company,
but when that company is International Business Machines
(NYSE: IBM), it's downright comforting.
IBM, affectionately referred to as Big
Blue, is a titan in the technology industry. The company
generated $96 billion in revenue last year and is about as
diversified a technology company as can be found, spanning
software, services, hardware and financing. Just over a third of
sales stem from the United States; the rest are spread
throughout Europe, Asia and the rest of the world.
Lately, management has deemphasized more cyclical hardware sales
and focused on higher profit software and service revenue. Sales
growth has been respectable during the past five years, rising
+5% on average. Cost controls and a push into higher-margin
businesses has resulted in operating
leverage, which is evident in a forward march in net profits
that have steadily increased from 9% in 2004 to close to 15% in
2009.
Sales should reach $104 billion this year, while earnings should
exceed $11 per share -- both would represent all-time records.
IBM's growth strategy is pretty straightforward: the company
simply wants to help firms utilize information technology to
more efficiently and competitively manage their operations. By
doing this, the company believes it can continue to gain
market share and increase margins over time.
IBM's 100-year history of providing impressive, consistent
returns has given analysts and management the ability to provide
impressive visibility. IBM has provided a road map for the next
five years in which it plans to focus on business analytics,
services and other higher growth market segments such as cloud
computing and energy efficiency.
The company anticipates hardware will represent half of total
company profits by 2015, with software accounting for most of
the rest. The company also expects 25% of sales to stem from
faster-growing overseas markets. All of this boils down to an
expectation of earnings of at least $20 per share by 2015.
Action to Take --> Based on
IBM's recent share price, the stock is trading for a trailing
P/E of about 12. Applying this to the 2015 bottom-line
expectations implies a share price of $240 per share, or nearly
double the current stock price ($20 est.
EPS x a P/E of 12 = $240). Averaged out and combined with
IBM's modest current
dividend yield of 2%, this represents a total annual
shareholder return of about +20% per year.
Nothing is certain in life, but given this stunning level of
forward guidance, IBM is one of the most visible, sure-thing
investment opportunities out there.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
