Why IBM Is a Buy
abhisht is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“In the third quarter, we continued to drive margin, profit and earnings growth through our focus on higher-value businesses, strategic growth initiatives and productivity.”
-Ginni Rometty, IBM Chairman, President, and CEO
I see a sense of positivity in IBM (NYSE: IBM), even though the stock still has ebbed and flowed over the past year. Prevailing macro-economic conditions have put IBM’s profitability to the test. However, the macro-economic scenario is not only affecting IBM alone, but other tech companies as well. As I analyze IBM's profit and loss statement, approximately 50% of the total revenue of IBM is of a recurring nature which is very strong point favoring IBM. This makes other tech stocks more volatile in the prevailing economic scenario in comparison to IBM.
Even though, recently published results are not favoring IBM stock, I think that this a short term phenomenon. It is the non-recurring items in the company's financial report that are generating low profitability figures.Revenue is stated as $24.7 billion for the Q3 '12, down by 5% in comparison to Q3 '11, operating net income $3.8 billion which remained flat in comparison to Q3 '11, also overall growth was down by 4% with growth in BRIC countries up by 4%.
However, if non recurring items are removed, a completely different outlook for P&L figures arises. For instance,revenue which is down by 4% is down by 2%, if currency impacts are excluded. Similarly, EPS & net income have increased by 8% & 5%,respectively, if they are adjusted for UK pension charges which is a non recurring charges. Also adjusted growth is 4% for the company as a whole & 11% for the BRIC nations, if non-recurring items are removed.
Hence, I see negative impact on profitability is more due to macro-economic conditions rather than a result of operational inefficiencies. Company itself reiterates its FY12 EPS as $15.10 which shows that management has full confidence in its operations.
In comparison to Infosys (NYSE: INFY) IBM has travelled a long distance. Infosys is slow on the movement of products. It's banking software Finacle contributes a very small amount to its total revenue.IBM has also adopted the Indian offshore model to provide cost effective services to its clients which brings IBM in direct competition to INFY.
Accenture (NYSE: ACN), which competes IBM on IT services segment, is also far behind of IBM. IBM's model has lots of diversity which allows client to avail almost all the services at one platform, which is not the case with Accenture, hence IBM looks more approachable.
I believe that it is one of the most important opportunities for the investors to buy the stock when performance of the IBM is not up to the mark and the price of the stock is low. Given IBM strong recurring revenue base and potential of its both hardware & software products bouncing back, I think the stock will bounce back to new heights.
I believe that the stock will bring good opportunity as IBM has strong product line up and annuity businesses heading into Q4 '12 that will provide a solid base of revenue, profit and cash. Hence, stock can be bought for the purpose of medium & long term investment.
akgupta88 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!