Over the past five years, IBM's (IBM) stock has trounced the S&P 500, Microsoft (MSFT), Dell (DELL), Hewlett-Packard (HPQ) and Accenture (ACN), and yet virtually nobody talks about it. (In fact, Cramer is the only commentator I can think of who has even bothered to mention IBM.) I guess it's easy to forget about IBM because the company only has $99 billion in revenue, over 436,000 employees and does business in 170 countries.
Tech is always filled with drama. It seems like every day another tech company is announcing layoffs, outsourcing, plant closing and complaining about declining margins. But IBM is drama-free. The company keeps marching toward its goals and continues to take over the enterprise. Skip the tech drama, and take a look at IBM shares; you'll be glad you did.
Last week, IBM reported strong second-quarter revenue of $26.67 billion (up 12% year over year) and non-GAAP EPS of $3.09 (up 18% year over year). Although results were stronger than expected, they did receive a big boost from currency. In constant-currency terms, the Systems and Technology division reported revenue of $4.7 billion (up 12% year over year), the Software business posted $6.2 billion in sales (up 10%), and Global Technology Services rose 3%, to $10.2 billion. Software accounted for 22% of revenue but 42% of profits. The only business within IBM that declined was Global Financing, which fell 11%, to $500 million.
Importantly, IBM continues to knock out impressive margins. On $26.7 billion of revenue in the second quarter, the company had a gross profit margin of 46.8%, up 1.2 points. IBM's software margins are on fire. Software reported an 88.4% gross margin. Even more impressive, operating expenses of $7.4 billion were down 20%, led by a steep drop in SG&A, which fell 18%.
Revenue from the company's growth markets increased 13%, adjusted for currency. Revenue in Brazil, Russia, India and China (BRIC) increased 21%. Growth countries represent 22% of IBM's total geographic revenue.
A strong product cycle drove IBM's hardware business up 17%. And the big IT deals are piling up. IBM's global backlog is gigantic. Backlog was up 12%, to $144 billion.
On top of that, the company boosted guidance. IBM raised its expectations for full-year EPS to at least $12.87 from at least $12.73 and operating (non-GAAP), diluted EPS to at least $13.25 from at least $13.15.
Who knew such a huge company could report such dramatic results?
Since 2000, IBM has added $10 billion in revenue in growth markets, tripled software profits and added $10 billion of pre-tax income, nearly tripled earnings, generated $109 billion of free cash flow, returned $107 billion to shareholders through buybacks and dividends, and spent $32 billion to acquire 116 companies.
By 2015, management believes IBM can earn over $20 a share through a combination of revenue growth, operating leverage, share buybacks, acquisitions and increased margins.
IBM is invading the rest of the world. Management believes by 2015, 50% of IBM's earnings growth and 30% of its revenue will come from expansion into growth markets. And growth isn't just coming from the BRIC countries; it's coming from all over the world. For example, the IMF predicts developing countries will account for 50% of the global economy; 40% of the world's population will live in emerging cities. China will build another 45 airports over the next five years. By 2015, the Middle East economies will spend $1 trillion on infrastructure. Indonesia is on track to spend $155 billion on roads and railways. Within five years, Asia-Pacific will handle 68% of global container traffic. By 2015, IBM believes it can capture $17 billion in incremental revenue from growth in the world economy. Mexico needs better securities exchanges, Russia needs water supply analytics, Tanzania needs to modernize its banking system, and Australia needs more computing horsepower for its broadband network. China, Russia and India are three of the six largest rail countries in the world, handling over 8 billion passenger trips per year. China plans to invest $600 billion in high-speed rail through 2015. Who do you think is going to keep track of all those passengers, provide ticketing, analytics, scheduling, and data management? Who is going to manage all the data for those new airports?
Although Hewlett-Packard has more revenue than IBM, IBM has twice the operating margin (19% vs. 9%), and the company continues to execute flawlessly. Because of all the restructuring and CEO drama, the investment community has left Hewlett-Packard for dead. Meanwhile IBM keeps outperforming. Historically, IBM trades between 12x and 14x EPS. If you assume IBM trades at the high end and use 2012 Street EPS estimates of $14.80, it's pretty easy to value IBM at over $200 per share. Looking at what the company has achieved in the last 10 years and looking at the opportunities going forward, it seems to me this IBM isn't your father's IBM.