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This Isn’t Your Dad’s IBM

Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coming off a stellar quarter and fiscal year, it shouldn’t be surprising new CEO Ginni Rometty is feeling a bit giddy. The first woman CEO in IBM’s (NYSE: IBM) long, storied history is a testament to a company that has worked hard to re-invent itself.

It wasn’t that long ago IBM was sitting atop the technology world as the clear leader in all things IT. And – as happens so often – the price they paid for their success was complacency. Complacent in believing their place in business computing was secure – after all, don’t you know who we are? From the company that in a very real way inadvertently spawned Microsoft, you’d think someone would have learned from history. Alas, it appeared it was going to repeat itself.

I can still recall the early '90s – I had just gotten into the business and investors and analysts alike were seriously questioning the viability of the company. The stock price had been cut in half; IBM had lost touch with not only their customers, but their mission, and their once vaunted reputation was in shambles.

That Was Then, This is Now

Sure, there’ve been some bumpy roads since former CEO Louis Gerstner was brought in 20 years ago to get IBM back to the glory days, but now? There are so many things right about this company – and the clear direction and plans they have for the future – they are once again stalwarts of the industry and investment portfolios.

The naming of the company’s first woman CEO this year is indicative of a company that now recognizes they live in a world that change isn’t just needed – it’s inevitable. And coming off several quarters of solid revenue growth, an outstanding year that saw significant jumps in earnings, margins and just about every other financial measurement – she's got some shoes to fill. And you know what? She appears more than capable of making it happen for years to come.

If you haven’t already, check out Rometty’s first letter to shareholders that was released last week. Here’s a leader who is clearly in charge, and more importantly understands the company’s vision of where they are today and where they need to be going forward. When she says IBM is on track to meeting its objective of bumping operating earnings up to $20 a share from the current $13 and change by 2015, she means it. And betting against her is going to be a mistake.

The balance sheet is sound, the emphasis on streamlining the workforce – more job cuts and realignment are in the cards – and technologies and services focused on Cloud computing are all spot on.

For investors it’d be easy to look at IBM today and think yeah, they really seem to be heading in the right direction but at nearly 16 times earnings there are better options out there. Microsoft (NASDAQ: MSFT) is trading under 12 times earnings and is just busting at the seams ready to explode. And let’s not forget $48 billion Hewlett-Packard (NYSE: HPQ) and the slightly smaller Dell (NASDAQ: DELL) - both solid values right now (as discussed just last week) with P/Es under 10. You’ll get no argument from me on any of those points.

But with a forward p/e of 12.5, a new CEO that has the bull firmly by the horns and cutting-edge technology innovations like the world’s first trillion bit chip, IBM is clearly not the IBM of old -- and that's a good thing. Once again IBM is a clear choice as the basis for a sound portfolio. How’s that for change?

The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

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