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International Business Machines Corp. (IBM), Waste Management, Inc. (WM): Paving the Way to Sustainable Earnings Growth

Large companies have been looking for ways to increase profitability in every way possible. Some are doing it by shaking up the types of product offerings, while others are making use of resources that were otherwise unproductive. The techniques great management teams use have been helping drive profits in big ways.

International Business Machines Corp. (NYSE:IBM)

Increase margins

International Business Machines Corp. (NYSE:IBM) has been slow to increase revenue recently, as uncertainty in healthcare costs and government spending triggered a reduction in corporate tech spending. How, then, has International Business Machines Corp. (NYSE:IBM) been able to double their earnings per share from 2005 to 2010, and be on track to double its earnings again to $20 per share from 2010 to 2015? Two words – increasing margins.

International Business Machines Corp. (NYSE:IBM) is a much different company today, than it was 10 years ago. International Business Machines Corp. (NYSE:IBM) lead companies to utilize the power of the internet with sales of their eBusiness solutions to increase the top line, and use the power of their mainframe systems to process those orders and maintain a business. It was truly a one stop shop for Corporate America’s IT departments.

Fast forward 10 years, International Business Machines Corp. (NYSE:IBM) has sold off its PC division to Lenovo, and is rumored to be selling off its low end server business as well. International Business Machines Corp. (NYSE:IBM) has also been on fire recently picking up small bolt-on acquisitions on its software side of the house.

Those software acquisitions fit IBMs model perfectly, purchase a product that isn’t available to a lot of customers, and then use its distribution network to springboard the value of that computer code. As IBM shifts to become a more software orientated business, its revenue can remain the same, but its profitability can skyrocket, as the variable cost for copying software is virtually zero.

IBM’s other strategy to increase earnings is to repurchase shares hand over fist. IBM has repurchased nearly 4% of its shares outstanding each year for the past 7 years. This has lead to a decrease of shares outstanding of nearly 30%. Between these two seemingly simple strategies, IBM’s management has maintained that it will continue to grow its earnings to $20 per share by the end of 2013. If IBM is able to hit that mark, it will be an increase of 15% per year, for a decade. Not bad for a company that is over 100 years old.

Turn waste to treasure

Waste Management, Inc. (NYSE:WM) provides collection, disposal and recycling services across North America. This company competes with local municipalities and other large corporate waste collection services like

Republic Services, Inc. (NYSE:RSG). The promising future for these companies is both in what they collect and what they produce with it.

Waste Management, Inc. (NYSE:WM) and Republic Services, Inc. (NYSE:RSG) both operate similar business models in signing contracts with customers to both collect waste and transport it to either a recycling plant or land fill. Between the two trash titans, Waste Management, Inc. (NYSE:WM) stands at $19 billion while Republic Services, Inc. (NYSE:RSG) has a market cap of $12.4 billion. Waste Management, Inc. (NYSE:WM) has an operating margin of 13.5%, and pays out 81% of its earnings to support a dividend of 3.6%, while Republic Services, Inc. (NYSE:RSG) has operating margins of 14% and pays out 60% of its earnings, supporting a dividend of 2.8%.

Waste Management, Inc. (NYSE:WM) and Republic Services, Inc. (NYSE:RSG) both have plans to convert their fleets to run off of natural gas to reduce costs, and to generate a portion of that gas from the landfills that they operate. Waste Management, Inc. (NYSE:WM) owns nearly four times the landfill space that Republic Services, Inc. (NYSE:RSG) does, and that gives them the edge when it comes to natural gas generation.

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