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Will IBM Continue Intel's Rally?

CNBC.com

Can IBM keep the good news coming with earnings after the bell tonight? Intel started all this, and there's every indication that IBM should help it continue.

The headline numbers are $2.02 a share on just shy of $24 billion, but IBM is a sum of all its parts, and its parts seem to be performing quite well. That said, these shares have been on quite the run recently, and that led Goldman Sachs last week to release a rather bold call, downgrading shares because of the lack of upside to the firm's $120 target.

Hmmm, that's an interesting call since IBM to date has outperformed the market, and a regular revenue stream from its wildly successful Services unit has done a fine job of insulating the company from the recession. Services profitability has increased in the past 16 out of 17 quarters, and Services and Software enjoy, annuity, long-term deals providing a nice recurring revenue stream. A source at the company says that's in obvious contrast to "cyclical, volume-oriented tech companies with exposure in the consumer markets, like Hewlett-Packard , Dell and Intel," among others. And while past performance is no guarantee of future results, it bears reminding that IBM has been one of the Street's, and tech's, most consistent performers.

Since 2003, IBM's seen profit margins jump from 36.5 percent to 44.1 percent last year, improving gross margins in 18 of the last 19 quarters.

On a unit by unit basis, Software has been quite profitable as well, helping IBM fund something like 80 acquisitions since 2003.

Some other factoids to consider: while so many tech companies are cutting back, IBM handed out raises to 240,000 non-executive employees globally, increased its dividend and continues to spend billions ($6 billion this year) on research and development (compared to HP, which has reduced its R&D spending from 4.6 percent of revenue in 2003 to 2.9 percent today.)

As far as tonight's report is concerned, IBM has already forecast $9.20 a share in profits for 2009, and the Street will be watching closely to see if the company reiterates that number (good); raises it (very good); or lowers it (very, very bad.) That last option is a long-shot, especially as the company continues to cut costs, manages expenses and keeps laser focus on that bottomline.

IBM Sign
Aaron Brown: Photography
IBM Sign

Meantime, IBM continues to face increasing competition from regular sources like Hewlett-Packard, and new sources, including Oracle (with its Sun Microsystems acquisition, which is a deal IBM reportedly walked away from); and now Cisco Systems with its move into the server market. And all of that at a time when IT budgets continue to shrink, at least according to Forrester which anticipates the US IT market to shrink by 5 percent, and 11 percent globally in 2009.

Still, with an economy poised for turnaround toward year end, or at the beginning of 2010, IBM, with so much diversification, no other company seems better positioned to take advantage of it. Intel's indicated that things are turning around, so similar words from IBM could be bullish indeed. Look, IBM is trying to operate in the same down economy as everyone else, but it seems clear that this company is being less affected by the bad news than others. Outlook today is absolutely key to IBM's report, and the pressure is on the company to keep this momentum going.

Questions? Comments? TechCheck@cnbc.com