Party with IBM like it's 1999

Analysts say shares could hit their highest level since the turn of the century.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Michael V. Copeland, senior writer

Fortune 40: The best stocks to retire on
After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.
Have you changed your spending habits in the past year?
  • Spending more
  • Saving more
  • No change

SAN FRANCISCO (Fortune) -- If you own IBM shares, hold 'em. If you don't, now might still be a good time to get a piece of Big Blue.

Like many tech stocks, IBM (IBM, Fortune 500) has been on a tear lately, up almost 41% since March 9 lows. But even though its shares are knocking on the door of 52-week highs, they still lag the blistering 64% increase overall of the Nasdaq (COMP) and, perhaps more important, the 56% rise of the S&P 500 (SPX) during the same period.

Over the past five years IBM has traded at an average P/E ratio that is about 10% lower than the S&P 500's, according to financial data firm FactSet. With a current P/E just north of 12, IBM now trades at about a 25% discount to the S&P 500. So if IBM reverts to more typical ratios, it has some room to rise.

How much? Barclays Capital analyst Ben Reitzes recently raised his price target on IBM to $140 (that would eclipse the record high of $138 set in 1999). Reitzes sees IBM benefiting from continued strength in its core software and services businesses, but he highlights the long-awaited return of corporate spending on hardware in 2010.

While it accounts for only about 17% of sales, IBM's hardware business has been the hardest hit during the recession, down 12% in the third quarter (margins fell slightly too). IBM has been beating Street estimates on earnings by cutting costs and wringing more margin out of its software and services businesses. Those sectors clearly dominate IBM, but all of IBM tends to do well when its hardware business is on a roll.

That hasn't happened yet. In the third quarter IBM yet again beat analysts' estimate for earnings, posting a 14% increase in net income year-over-year. Revenue, however, fell 7% during the same period (the decline was much smaller than in the previous quarter).

IBM didn't show the top-line growth that investors are looking for, in part because of the continued hit its hardware business is taking. Without evidence of a return to revenue growth, IBM shares were punished the day after its third-quarter earnings were announced, dropping 4%.

But the next six months are likely to offer a rosier picture, says Mark Loughridge, IBM's CFO. Loughridge predicts a return to revenue growth in the fourth quarter, driven by improved performance in both its software and hardware business.

"We're not just saying we see an improvement in profitability for our hardware business going from third quarter to fourth quarter," Loughridge told analysts. "We're looking at it and saying that the hardware business ought to be growing profitability at double-digits as we go into the fourth."

Remember, all of IBM does well when its hardware business is humming. So if you start to see an uptick in sales of servers, storage systems, and mainframe computers, you're also likely to see continued upside for Big Blue. To top of page

Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.21 0.00 0.00%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 10:11pm ET
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.