International Business Machines Corp. (IBM)’s Long-Term Potential

has been rewarding shareholders over the years with its stable growth coupled with robust buy back and healthy dividend programs. It has returned over $150 billion to shareholders since the year 2000. But the company’s recent quarter earnings disappointed analysts and raised a few eyebrows regarding the company’s future. Is this event a red signal for long term investors, or will it be just a minor speed-bump in an otherwise long and successful journey? With a time horizon of over 5 years let’s see if International Business Machines Corp. (NYSE:IBM) makes a sensible buy.

International Business Machines Corp. (NYSE:IBM)

The main reasons for the earnings miss were exchange rate issues because of the weaker yen, a slowing down of the hardware business, and a slowing European economy. The currency problem will take some time to solve, but it does not show a weakness in International Business Machines Corp. (NYSE:IBM); it’s a problem that many companies are facing.

The European downturn shouldn’t last forever, and so with a time view of over 5 years International Business Machines Corp. (NYSE:IBM) shareholders might come out as winners in the end.

And finally, the company is shifting from its slowing hardware business to other high-margin, fast growing businesses, which will improve revenues and profits in the coming years.

International Business Machines Corp. (NYSE:IBM) has smartly reduced its hardware business to just 17% of the overall revenue compared to over 50% in the early 90’s. It is focusing more on the Global Technology Services Segment and the Software segment, which now account for over 81% of the company’s revenues. The services and software segments are high margin businesses, and as International Business Machines Corp. (NYSE:IBM) gains a strong foothold in this segment its margins might improve further and reward patient shareholders. According to Zacks, gross margin is expected to increase by 70 and 50 bps on a year over year basis to 49.4% and 49.9% in FY13 and FY14, respectively.

Businesses use data analytics to analyze massive amounts of information in order to predict patterns or changes in customer behavior. Data analytics service businesses are booming today, and IDC estimates some $2.5 billion is being channeled into big data start-ups. Experts estimate big data analytics is going to be a huge industry in the coming 5 years, and thus investors should start to look for value buys in the industry. International Business Machines Corp. (NYSE:IBM) is intelligently tapping this market. It has acquired 54 data analysis companies since 2005 and forecasts that by 2015 this segment will generate more than $20 billion in revenues. The company is also spending $100 million on research and development in the sector.

is one company that is progressing at a high speed in the data analytics segment, and expects to increase its customer base by 40% this year. The company estimates 2013 revenues to be around $260 million- $270 million. But it is a bit expensive at present, with a price to sales ratio of 20.14 and a forward P/E of 394.27.

is also going full steam in the cloud computing business. Last month it introduced

a new line of servers named HP Moonshot which are expected to consume 89% less power and cost 77% less than the traditional servers.  The company believes that social-media, cloud-computing and e-commerce sites, which are equipping data centers with millions of servers, will be the targeted clients as the mushrooming online traffic creates demand for efficient data storage and handling equipments . The server business is a $51.3 billion market, and Hewlett-Packard Company (NYSE:HPQ) is second to IBM in this business. The company expects Moonshot to represent around 15% market share by 2015.

But Amazon.com, Inc. (NASDAQ:AMZN):


remains the leader at present.
Amazon.com, Inc. (NASDAQ:AMZN)’s web services generated over $600 million last quarter, and analysts expect this segment to generate over $3.8 billion this year. A noted analyst projects profit margins to be more than 50% in this segment, which means Amazon.com, Inc. (NASDAQ:AMZN) is profiting very heavily from this business.

IBM has an impressive history of increasing shareholders wealth, having returned over $150 billion since 2000 through share buy-backs and dividends. It plans to repurchase $50 billion worth of shares and pay dividends worth a total of $20 billion by 2015. This is one of the key reasons why IBM is one of Warren Buffet’s biggest holdings.

IBM’s average earnings growth rate for the next five years is pegged at 10.5%. Analysts at Zacks have a long-term (2011-2015) EPS target of $20. It currently trades at 2.20 price to sales ratio and a forward P/E of 11.08. The company expects its geographical revenues to account for 30% of its geographic revenues b y 2015. And the $20 billion that it plans to spend on acquisitions by 2015 is expected to contribute $0.90 in EPS by 2015.

IBM seems to be stable at present with a steady growth ahead. Its foray into high margin businesses will fuel its growth going forward. By the time IBM gains a fat share in the new businesses, its steady dividend and buyback programs will ensure shareholders are getting a healthy return for their investment. That’s why long term investors looking for a steady return without much volatility should definitely consider IBM.

The article Where Does IBM Stand in the Long Term Scheme of Things? originally appeared on Fool.com is written by harsha lohia.

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