Analysis: IBM's plain vanilla flavor leaves investors satisfied

While IBM's rivals have suffered through earnings misses, massive executive upheaval or seismic strategic shifts, Big Blue has been the technology world's most consistently performing company since narrowly avoiding bankruptcy 19 years ago.

Sure, IBM lacks an obvious wow factor. Indeed, the company is to the technology world what vanilla is to ice cream: plain.

But in the business world, plain is simply another word for dependable, and IBM has grown into one of the few companies analysts and investors can count on to deliver on its promises each quarter.

"With IBM, once they lay out a strategy, they stick to it, they don't tend to shift direction," Chris Ambrose, an analyst at research firm Gartner said.

According to FBN Securities analyst Shebly Seyrafi, commitment, consistency and a predictable flow of revenue are the ingredients of IBM's secret sauce.

"They derive about 90 percent of their profits from services and software ... that tends to be higher margin and has recurrent revenue streams," Seyrafi said. "They have been able to execute well on the bottom line and that includes share buybacks ... even if they are not growing top line that well."

IBM's reliability over the years is even more remarkable when juxtaposed against the problems plaguing some its peers.

Software maker Oracle, for instance, shocked investors last month with a rare quarterly miss. Oracle, like IBM, benefits from steady and predictable long-term contracts, leaving investors to question its powers of execution.

Canaccord analyst Richard Davis said that much of the miss was company-specific "because some buyers waited for a new hardware upgrade, and on the software front the firm is behind the curve in cloud applications."

IBM rival Hewlett Packard has been flip-flopping on its PC strategy and is vulnerable to the decline of PC shipments. It also has a larger exposure to Europe than IBM, which has squarely set its sights on emerging growth markets.

"IBM has effectively used acquisitions to gain footholds in strategic end markets, broaden its customer footprint and improve growth," ISI group analyst Brian Marshall said.

IBM has also managed to avoid the executive-suite turmoil that has gripped HP, which has fired three CEOs in a row. By contrast, IBM without fanfare or drama late last year named Ginny Rometty as new CEO.

"Consistent execution has become a hallmark of IBM management and we saw no signs of disruption as former CEO Sam Palmisano passed on the reigns to longtime IBM veteran Ginni Rometty," Marshall said, adding that IBM was as automatic as the mailman.

Another giant in the tech sector, Cisco, moved too aggressively into consumer products, neglecting its core strengths. Now, that company is at pains to prove to investors that it can return to its former glory.

Faced the abyss and came back

IBM, founded in June 1911, is best known for its mainframe and personal computers but it also made coffee grinders, typewriters and invented the magnetic stripe technology used on the back of credit cards.

By 1993, the company, based in Armonk, New York, had turned into a bloated fragmented organization that was bleeding money as smaller, more nimble competitors took away its business. IBM nearly went out of business before embarking on a gut-wrenching turnaround.

In a bold strategic move, IBM first bought PriceWaterhouse's consulting. Next, the company decided in 2004 to exit the PC business, betting that its future was in finding solutions to business problems with the help of software and technology.

It is currently in the second year of a five-year strategic plan that began in 2010. The core of the plan is to focus on what IBM perceives as growth areas - data analytics; "smarter planet," or making things like traffic, power grids or food production work better; cloud computing; and emerging markets.

The company also plans to deliver earnings of $20 per share by 2015. This year it aims to reach at least $14.85 despite ongoing macro-economic concerns in Europe and expected currency headwinds. Its earnings in 2011 were $13.44 per share.

According to Gartner's Ambrose, IBM does not sell products so much as offer software, technology and services that solve problems.

The portfolio of services that IBM offers - unlike General Electric, for example - is focused on one area, the IT sector. But within that sector IBM's offerings can range from analyzing data to helping cities manage traffic flow to retailers mining social media data to know which products will sell best.

Marshall called IBM the "most defensive play in technology and a great safe haven in tough times" because it generates more than half of its sales from services that are often recurring and often tied to long-term, multiyear contracts.
(Reporting by Nicola Leske; Editing by Peter Lauria, Gary Hill)

Source: Reuters

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