IBM Overview

Copyright 2009 by Morris Rosenthal - - contact info

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Copyright 2009 by Morris Rosenthal

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Notes on trading IBM stock for investing

Back in 2005, IBM sold 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, but still 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. With a market cap of $143 Billion, and earnings per share of $9.02. IBM is the most successful information services technology company in the world.

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 their dividend has slowly increased, currently $2.20/share in 2009 or a little over 2% at the current share price of $108. IBM boasts a relatively low P/E ratio for the software/services segment, just under 12 times earnings at the current level, and moderate to low institutional ownership at just over 59%. Their trading volume has been growing since 2005 as the market becomes convinced that their services strategy is working for the long term.

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 $100, but they are probably one of the strongest big cap companies in the world.

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