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Blue skies for Big Blue
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November 15, 2001: 10:44 a.m. ET
That IBM should be something other than strictly a tech concern is a good thing in times like these.
Adam Lashinsky
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NEW YORK (CNN/Money) - There, they've all but admitted it: IBM says it isn't primarily a technology company anymore. Like so much in the investment world, this is a matter of semantics: If it walks like a tech stock and talks like a tech stock, etc. But hold the outrage. That IBM should be something other than strictly a tech concern is a good thing in times like these.
The suggestion that IBM (IBM: up $0.40 to $114.75, Research, Estimates) isn't all about technology comes from Sam Palmisano, the company's president and chief operating officer and heir apparent to CEO Lou Gerstner. In an address to analysts and investors in New York Wednesday evening, Palmisano bragged that "technology" (semiconductors and hard disk drives) accounts for just 8 percent of IBM's revenues, compared with 82 percent for "infrastructure" (including outsourcing, software, servers, storage systems and PCs) and 10 percent for "business transformation," a murky category referring to IBM's high-end consulting operations.
Of course it's all tied to technology, but IBM's fortunes are so much greater than the current gadget product cycle. Indeed, IBM's triumph at the beginning of the millennium is to have stuck to its do-it-all strategy. The key is its $33-billion services business, an operation that Chief Financial Officer John Joyce describes as an annuity, a constant source of cash. In other words, plugging away at mainframes and PCs and other messy tech products has led IBM to its stubbornly consistent services business. Buyers of numerous IBM products naturally hire IBM to put it all together, and do so for years, whether or not they're buying new IBM products.
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IBM's performance vs. the Nasdaq. (BigCharts) | |
Yes, IBM has lost money on PCs for four years running and the disk-drive business is frustratingly volatile. But the fact is that IBM's competitors are imitating IBM's soup-to-nuts strategy because it works well in good times and exceedingly well in bad times. Note how IBM has outperformed the Nasdaq composite over the last 12 months. And as dot.coms vanish and established tech players tumble, IBM continues its boring single-digit revenue growth and double-digit earnings growth. According to Multex.com, Wall Street forecasts 2002 earnings of $4.86, up 11 percent, and revenues of $91.6 billion, an increase of 5 percent. A sure sign IBM is doing something right: its competitors are imitating it. Witness Hewlett Packard's proposed acquisition of Compaq, an effort to make HP more IBM-like.
"They see the world the way we see the world," says Palmisano, happily reminding his listeners that while IBM has worked for a decade at being an integrated technology player, HP and Compaq face huge risks trying to get there.
The payoff for the safety-seeking investor is clear because IBM never reached the nosebleed valuations of its rivals and today remains a relatively inexpensive stock. And it isn't ashamed to admit its success is due to consulting and systems integration, not PCs or disk drives. Just as General Electric is unapologetic that its financial-services business accounts for a disproportionate share of its profits, IBM brags that its services businesses are its earnings drivers. The difference is that GE trades for as much as twice the P-E multiple of high-quality financial-services firms like Goldman Sachs or Morgan Stanley (30 times trailing earnings for GE versus 20 times for Goldman and 16 times for Morgan), while IBM's multiple of 26 times trailing earnings is comparable to consulting competitors like Accenture (23) and EDS (25) and far below current multiples of technology competitors like Sun (164), Intel (56) and Oracle (32).
Go-go tech stock it isn't. Relatively safe and exceedingly diversified? That's IBM.
Henry hangs it up
Henry Blodget once told me that being a sell-side securities analyst was like getting whacked in the head by a two-by-four every day from numerous directions. Buy-side and corporate clients, retail investors, investment-banking colleagues and others are all displeased with the analyst for a variety of reasons at various times. So it comes as little surprise that the rocket ship Blodget plans to come out of orbit for a bit; Blodget said Wednesday he'll leave Merrill Lynch, accepting a generous buyout offer. After the first few million dollars earned, a guy with a Yale history degree who wears wrinkled white shirts to fancy dinners and hiking boots on the golf course just doesn't need that many more whacks up alongside the head.
You can read elsewhere how Blodget misled investors, botched the major trends of the Internet, caved to investment-banking pressures and other transgressions, all more or less true. In his defense, I'll always recall the self-deprecating and responsive analyst who saw the opportunity the Internet economy offered and grabbed it. Blodget's detractors forget that a stock element of his early bullish calls on the likes of Amazon.com and Yahoo was that they there were not "bet-the-farm" stocks, that they should make up only a small part of an aggressive investor's portfolio. He long said most Internet firms would fail. The prudent investor could take Blodget's pronouncements in their totality and craft a strategy accordingly.
In the end, Blodget's personal timing is impeccable. He seized the moment, fulfilled his obligations and is moving on now that the jig is up. The trick for clever careerists and trend-riders everywhere is to watch for his next move. 
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