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International Business Machines Corp. (IBM) Is Making the Right Moves

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International Business Machines Corp. (NYSE:IBM) recently reported that workforce re-balancing will cost the company $1 billion. The company is hoping to cut down on the size of its labor force in the systems technology group. The segment will reduce its size by 121 employees. The company is hoping to grow its business by focusing on hybrid-cloud technologies and cutting costs in non-performing segments.

Changing landscape is hurting IBM

The competitive landscape has been foreboding to International Business Machines Corp. (NYSE:IBM). However, the hoped for outcome is restructuring in the systems technology group in order to increase the amount of revenue. Likewise, the company will be growing the revenues in its cloud division. The problem is that the growth in the cloud segment is unlikely to make up for the significant decline in sales from systems technology. The systems technology group reported a 17% decline in revenues year-over-year.

International Business Machines Corp. (NYSE:IBM)International Business Machines Corp. (NYSE:IBM) will have to compete with companies like Hewlett-Packard Company (NYSE:HPQ), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT). Hewlett-Packard could under-cut major competitors within the space and is heavily focused on process-driven initiatives in order to increase efficiency. The company is developing solutions in anticipation of unique problems and will be rolling out cloud solutions. Hewlett-Packard isn’t the only problem though. Amazon is notorious for being ridiculously competitive in cloud virtualization. Amazon is by far and away IBM’s biggest threat. Unlike Hewlett-Packard, Amazon doesn’t have to balance the needs of other IT businesses as Amazon is heavily diversified and generates significant revenues from retail within the United States and internationally. Amazon isn’t at risk of cannibalizing any of its existing businesses.

Meg Whitman in a recent interview reiterated the strength of Hewlett-Packard Company (NYSE:HPQ)’s core assets. She also stated that consumers of Hewlett-Packard want to see Hewlett-Packard win because Hewlett-Packard has a strong brand presence in the enterprise computing space and has very fair pricing practices. Meg Whitman believes that Hewlett-Packard will generate revenue growth in 2014.

IBM turnaround

I believe that International Business Machines Corp. (NYSE:IBM) will stem the decline in revenue growth prior to 2015. The company believes that it will generate at least $20 in earnings per share. The company’s EPS growth will be driven by a mix of share buybacks, emphasis on software (which will represent a greater percentage of profit), and $20 billion in acquisitions. The company currently generates $14.50 per share; so the company’s guidance to earn $20 per share is what’s keeping investors on board.

Chances are high that the company will cut costs in its systems technology segment at a faster rate than the rate at which revenues decline. This strategy will meet its long-term earnings per share target. The company will then acquire companies for intellectual propertyand customers, in order to maximize net income. The acquisitions will include cloud companies or companies in big data.

Following that, the share buybacks will help to inflate the EPS figure (the company plans to return $70 billion to shareholders by 2015; the company’s market capitalization is $223 billion). While I am slightly concerned by the company’s system technology segment, I believe that the company’s earnings growth will continue as planned.

Other investment opportunities

Hewlett-Packard Company (NYSE:HPQ) could be a compelling investment opportunity. The company’s computer business should eventually stabilize by 2014. Meg Whitman anticipates that because Windows XP support will end in Q1 2014 that there will be pent-up demand in the enterprise market. Currently 40% of businesses still use Windows XP, so we could see a substantial amount of growth in desktop and laptop computer sales. IDC also forecasts that international demand will offset the decline in US computer demand. International laptop PC sales are projected to grow by 3.9% in 2014; according to IDC this will offset the decline in domestic computing demand.

Hewlett-Packard Company (NYSE:HPQ) is currently heavily focused on cutting down on its head count and is more focused on improving business processes in order to generate higher rates of profitability from its PC business. So far the company seems to be succeeding, and analysts anticipate the company growing its earnings from $0.31 per share in 2012 to $3.57 per share in 2013. The company has been able to stabilize its operations in 2012, going from near break-even to reasonable profitability in 2013.

Amazon.com, Inc. (NASDAQ:AMZN) is a also a compelling investment opportunity. The company is expanding its retail footprint internationally, which was hit by some trouble in consumer sentiment in European markets. The company has built out retail distribution infrastructure throughout Europe, Asia-Pacific, and South America. I believe the company’s revenue growth will improve from the 16% it reported in its latest quarter. The company’s spending on property and equipment has gone up by 114% per year, implying that the company’s management team has been able to identify and eagerly execute upon growth opportunities.

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