A Cloud-E (Enterprise) Future For IBM
Chuck is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Once thought of as the stodgy old blue-chip mainframe computer company, International Business Machines Corp (NYSE: IBM) has remarkably reinvented itself numerous times over the past two decades. Consequently, as I will soon show, IBM has produced one of the most consistent operating records of any technology company. I believe that IBM has achieved this remarkable record through the understanding that technological advancement is increasing exponentially, and therefore, to remain current, they must change with the times. More importantly, they must be prepared to change radically when necessary. It seems that IBM has been up to the task, perhaps better than any other tech company.
IBM’s focus on remaining relevant is vividly expressed by the simple yet powerful manner in which they express today’s IBM to both their customers and their employees. For example, they crystallize the opportunities, benefits and promise of technology as follows : “A Smarter Planet. Instrumented. Intelligent. Interconnected. How we use data. How industries collaborate. How we make a smarter planet.” Likewise, they have succinctly expressed the essence of cloud computing with – “IBM cloud computing: Rethink IT. Reinvent business.” And they bring it all together describing it as “IBMSmartCloud.”
Consequently, IBM has been able to move their business to higher value areas where today over 60% of their revenues are reoccurring, or what they call annuity versus transactional. All of this has contributed to a remarkably consistent historical record of earnings growth. Utilizing the F.A.S.T. Graphs™, Fundamentals Analyzer Software Tool, I calculated IBM’s earnings growth rate over the past 15 years, 10 years and finally the past 6 years discovering a double-digit earnings growth rate for each time period.
The following earnings (orange line) and price (black line) correlated graph shows that IBM has grown earnings per share at a compounded rate of 11.2 % since calendar year 1998. The light blue shaded area shows their dividends. I’ve highlighted each individual year’s earnings growth rate at the bottom of the graph to provide a clearer view of consistency.
The following performance table shows that long-term, buy-and-hold, IBM shareholders were well rewarded since 1998. Note the gradual expansion in IBM’s dividend payout ratio.
The following graph shows IBM’s earnings growth record since calendar year 2007. Remarkably, this $225 billion market cap technology giant has more recently accelerated its earnings growth to over 16% per annum, evidencing the power of technological change and advancement.
Average shareholder returns have increased along with IBM’s earnings growth rate. Not a bad record considering it was achieved during and through the great recession.
IBM Versus its Competition
The following table looks at IBM versus its major competitors -- Hewlett-Packard (NYSE: HPQ), Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL) -- making a compelling argument that the best-of-breed technology companies may all be on sale. It’s incredible to consider that each of these technology giants are expected to provide double-digit earnings growth over the next five years.
Thesis for Growth
IBM’s management team, led by veteran IBM’er Virginia M. Rometty who was recently elected president and chief executive officer of the company, has a clear vision of growth and an objective of achieving at least $20 a share in earnings by 2015. This translates into an approximately 11% growth rate and corroborates the consensus of leading analysts as evidenced by the following Estimated Earnings and Return Calculator. Applying a normal PE ratio of 15 times earnings would imply an IBM share price at over $300 per share by 2015.
Follow this link to IBM Business Perspective 2012 presentation for a more detailed look at how IBM plans to accomplish their 2015 roadmap of at least $20 of operating earnings.
Summary and Conclusions
IBM is a company with a clear perspective and vision of how they can grow their business over the intermediate future time frame. Most importantly, they are an established technology giant that is not afraid to reinvent their business as technology evolves. Longer-term, IBM labs, their research arm, is second to none. The recent announcement of their “Holey Optochip,” the first parallel optical transceiver to transfer 1 trillion bits -- one terabit -- of information per second represents clear evidence that IBM is prepared to meet the challenges of “Big Data” and the rapidly advancing world of cloud computing.
But perhaps best of all, I believe IBM is a bargain at its current valuation. Consequently, I believe the company offers above-average growth and a dividend yield greater than the 10-year Treasury bond, all at a very reasonable or even low level of risk. In the utmost spirit of IBM, it’s elementary my dear Watson.
Disclosure: Long (NASDAQ: ORCL), (NASDAQ: MSFT) and (NYSE: HPQ).
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