Big Blue: Bargain or backlash?
IBM is the best performer in the Dow this year and the stock still seems cheap. But concerns about a pricey Sun deal and layoffs could come back to haunt it.
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| The Dow is still down sharply for the year -- despite a March rally. But IBM has managed to stay in positive territory even as the rest of the market tanked. |
NEW YORK (CNNMoney.com) -- It's the last day of a first quarter that most investors would like to forget. Stocks may have bounced back a bit in March, but the Dow and S&P 500 are still down more than 10%.
In fact, only two stocks in the Dow are actually up year-to-date: IBM (IBM, Fortune 500) and Intel (INTC, Fortune 500).
IBM -- or Big Blue -- has been a steady performer, gaining 12% this year and defying the economic downturn with a diverse set of tech businesses that include software, services and hardware.
IBM could become even stronger if it pulls off the widely rumored acquisition of Sun Microsystems (JAVA, Fortune 500), the high-end server maker that is also the creator of Java software.
But is IBM, which according to several reports may pay as much as $6.5 billion for Sun, now becoming a Big Blue risk? After all, a deal for Sun at the speculated price would be IBM's largest acquisition in its history.
In the past, the company has been particularly good at digesting acquisitions -- the purchases of software firms Lotus and Tivoli in the 1990s and PwC Consulting in 2002 come to mind. But it's uncertain if IBM will be able to work its magic on Sun.
Adding Sun to IBM would mean that IBM would once again have a bigger presence in hardware, a lower profit margin business than software services. What's more, Sun is expected to post a loss for its current fiscal year, which ends in June.
However, one analyst noted that IBM may be able to more easily find ways to profit from Sun's software simply because it has such a big presence globally.
"IBM has made a living acquiring good software franchises and technology. If there is a deal in the works with Sun, that's the angle they are looking at, the software. They may be more able to monetize Sun's software than Sun ever would," said Bo Fifer, a technology analyst that works with the TCW Diversified Value fund, a holder of IBM.
Maybe so, but Sun is not the only challenge facing IBM. The company is also said to be close to announcing 5,000 job cuts in the United States -- even as Big Blue seeks to hire more people in emerging markets like India and China.
The issue of IBM moving jobs offshore is nothing new. Critics of the company have taken IBM to task for years for outsourcing to non-U.S. workers.
But a new round of criticism would come at a politically sensitive time. IBM is bidding for what could wind up to be lucrative contracts tied to the recent $787 billion stimulus package. A backlash for laying off U.S. workers has the potential to hurt IBM's chances.
"Hopefully, Congress doesn't start attacking companies for having international employment," said James McGlynn, manager of the Calvert Large Cap Value fund, which owns shares in IBM. "In a worst case scenario, they may decide to not give them stimulus money. But I don't see that as a major cause for concern."
Would such attacks come as a huge surprise though? 2009 is shaping up as the year of the angry taxpayer.
AIG (AIG, Fortune 500) and big banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) have come under fire for how they've used bailout funds. Is it that much of a stretch to imagine politicians raking companies receiving stimulus money over the coals if some people think they are moving too many jobs abroad?
A spokesperson for IBM wasn't immediately available for comment about possible layoff announcements, stimulus contracts or the rumored Sun deal.
Neither McGlynn nor Fifer seemed overly worried about IBM taking a stumble in the near-term.
For one, Fifer doubted that IBM would become the subject of an AIG-like populist rage centered on outsourcing. "Outsourcing is such a pervasive trend. It's not an IBM specific issue. The trend toward offshoring is part of a macroeconomic debate that's gone on for years. There is no unique concern with respect to IBM," he said.
McGlynn pointed out that, at the end of the day, IBM continues to stand out among other large cap stocks because it has been able to generate steady, if not spectacular, results. Analysts are predicting that IBM's earnings per share will increase about 2% this year and 8% in 2010.
That may not sound fantastic until you realize that profits for the S&P 500 are expected to decrease by 6% this year. What's more, IBM is still a relative bargain, even after this year's run up, trading at about 10 times 2009 earnings estimates.
"It's nice to own a company that is in a fairly good position economically speaking while many other more cyclical companies are weak," McGlynn said.
So even though IBM is certainly not a stock without some headline risk, it looks like Big Blue should be able to hold up well in these uncertain times. 
