Tech Check

IBM Does Intel, and Other Tech, One Better

IBM Sign
Aaron Brown: Photography

IBM's fourth quarter earningsare a testimony to the transformation this company has undergone over the past decade, and it seems like the strategy will continue to pay dividends.

The company easily beat Wall Street expectations tonight, reporting $3.59 a share against the $3.47 analysts expected, on slightly better-than-expected revenue of $27.2 billion (consensus was at $27 billion.)

But the really good news was that the company upped its full year 2010 guidance from a range of $10 to $11 to "at least $11." The Street was already toward the high end of that range, at $10.90 or so, which means for IBM to come in even above that is particularly bullish on where 2010 goes from here.

Other nuggets to take away from the report: IBM's fourth quarter gross margin was 48.3 percent, in line with the optimistic outlook from those on the Street that this company would come up with a way to continue expanding margins, which it has done regularly for the past five years, which is impressive all on its own. The company's $18.8 billion in signings also strongly beat the $16.8 billion expected; Technology and Business Services at $10.1 billion and $4.6 billion respectively both beat the Street while Software and Systems/Technology both came in in line at $6.6 billion and $5.2 billion respectively.

IBM also now sits atop a $14 billion cash warchest, adding about $2.5 billion from just a quarter ago.

So, why does IBM look better right now than other big cap tech peers in the marketplace? Consider how cyclical other companies are compared to IBM. Intel had a stunning report just last week that showed net income jumping a staggering 875 percent from the fourth quarter of last year. But that figure, $2.3 billion, gets Intel back to where the company was during the fourth quarter of 2007. Essentially, big cap techs like Hewlett-Packard, Dell,Intel and others, are merely "re-setting" their businesses after the deep economic downturn. Conversely, IBM's bottomline continues to grow, and steadily: $4 billion in net income during Q4 of 2007; $4.4 billion during Q4 last year; $4.64 billion tonight. It's a testament to the company's focus on higher margin, higher quality business opportunities, most notably the company's transition to a global services leader.

Says Edward Jones analyst Andy Miedler: "We think there is still plenty of room for upside. Now, IBM shares are trading at only 12 times (forward earnings) estimates. For a company that executes as consistently and has as solid a long-term earnings prospect as IBM, we think there is plenty of room for shares to move higher."

Lou Miscioscia at Brigantine Advisors, says the company taking its 2010 EPS target to "at least $11," is "conservative, because we believe that technology spending is starting to improve broadly." Further Brigantine says the services signings number of $18.8 billion beat its own estimates by $1 billion.

Bottom line: Like Intel before it, IBM wowed the Street. Now the company needs to make sure that its big earnings and share price celebration doesn't evolve into a big earnings and share price hangover. Fact is, the downturn has taught these companies how to manage expenses and keep the businesses growing. IBM proves tonight just how well this company is executing and how big the opportunities are ahead of it. IBM's numbers, along with Intel last week, bode well for Microsoft, HP, Cisco, and even Apple. Big cap techs like Cisco, IBM and HP trading at 11, 12 or even 14 times earnings with the realistic growth potential they see ahead, seem seriously undervalued, even today.

Tech is beginning to spawn a rally: Intel and IBM so far. eBay, Google, Microsoft and Apple coming next.

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