IBM Overview

March 11th, 2005 - Copyright by Morris Rosenthal - - contact info

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Trading Notes

Copyright 2005 by Morris Rosenthal

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Notes on trading IBM stock for investing in my SEP

IBM just received regulatory approval to sell off their PC business to Lenovo of China, so ending the consumer/desktop adventure for the company that invented the personal computer (PC), in name if not in essence. IBM has long since made the transition from a hardware company to a software services company, though they still derived nearly a third of their revenue from hardware sales last year, which was actually their fastest growing business segment in 2004. Expect that to drop by 40% in 2005 with the exit of the PC business. IBM also boasts some of the best applied physics labs in the world, and plays a leading role in semiconductor development. IBM sold off their hard drive division to Hitachi at the end of 2002 for $2 billion, another segment in which they were both a pioneer and an industry leader, so their primary branded hardware offering these days is big iron, which I'll always think of as "mainframes." However, that's not where the money is at. 2004 was a record year for IBM, with revenue nearing the $100 billion mark at $96.3 billion, and a 14% increase in earnings per share to $4.94. IBM is the most successful information services technology company in the world, with IT services accounting for nearly half their overall revenue. Another 15% of revenue comes from software sales, and a little over 31% from hardware sales.

IBM historically spends more than $5 billion a year on R&D and leads all US companies in patents granted. Still, R&D spending only runs about a third of selling and overhead expenditures. They are truly an international company, with less than half of their revenue coming from the Americas. IBM is yet another company that prefers share repurchase over dividends, though at least they pay a dividend, $072/share in 2004, or less than 1%. By the same token, they spent $7.1 billion of share repurchases, nearly six times as much, which makes you wonder if executive compensation is tied to share price. IBM boasts a relatively low P/E ratio for the software/services segment, just under 19 times earnings at the current level, and moderate to low institutional ownership at just over 55%. They also have pretty low trading volume for a "high-tech" company with a big name and market cap nearly $150 billion, with average volume less than 5 million shares a day.However, the current book value of $18/share isn't too impressive on at $90+ share price.

IBM is too big to exist in a vacuum, their growth and profits depend entirely on the macro-economic conditions in the world. The problem is I don't quite know if they do better when things are getting better or getting worse. So much of their revenue is from outsourcing and consulting, services that companies traditionally turn to when they need to cut long term costs by reducing head count., which frequently occurs in economic downturns. On the other hand, reducing head count just to get a rise out of ones earnings estimates has also become popular with corporate cutthroats, so maybe the picture is entirely rosy. I have a bit of a mental block with the share price being over $90, but they are probably one of the strongest big cap companies in the world.

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