Tech Stocks: IBM Breaks to Six-Year High on Continued M&A Success
By Ann Sosnowski, American Capitalist
Just look at those blue-chip stocks go!
After Wednesday’s decline on the Dow Jones Industrial Average, the Dow was trading above 14,000 yesterday, still on top of strong 10-day Moving Average support.
Much of Wednesday’s slight (and I mean slight) weakness came from Fed President Ben Bernanke’s assent that while the housing slump has yet to occur straight across mainland America, and currently doesn’t affect consumer spending, it may do so in the future.
The Fed lowered its growth forecasts for this year and 2008 on continued expectations of the housing slump. Investors pulled out of American large caps on Wednesday, but dumped the money right back in yesterday, taking it almost to a new high.
How optimistic are investors? Well, according to put/call ratios over the last three days on the DJX index, a tradable gauge of the Dow, there’s healthy hedging of stocks at only 1.12. That indicates to me a continued rise over the rest of 2007, at least on major American equities.
Of course, the biggest gainer yesterday on the Dow was old tech standby International Business Machines (IBM:NYSE), which is starting to see fantastic results from its small software company acquisition plan. You could say it’s an old dog learning new tricks… and being praised for it.
IBM is already a part of my Diligent Investor portfolio, and after yesterday’s brilliant gap up in price on earnings news, is showing subscribers gains of 40.90% after a little more than a year of hold time.
IBM’s earnings “surged” 12% on global services and software, bringing its sales to $2.26 billion, or $1.55 per share. The stock itself popped to a six-year high of $116.48 -- good for company that was only valued at $73.70 per share a year ago! The 4% gain on the day is the largest one-session gain since 2004!
The forecast for IBM was $1.47 per share, blowing analysts’ expectations away by 3 cents if you don’t consider money made from IBM’s sale of its printing business.
Most important for the tech giant is that it’s seeing exceptional growth, at 10% this quarter, in its global service deals. The total value of its service contract deals was $11.7 billion, up 22% over the same time last year.
IBM’s M&A activity, especially its interest in software companies, shows that IBM is willing to branch out into new sectors and take more control of positioning itself in the global market. As a large company, its fundamentals are mostly all in the solid single and lower double digits: a 10.38% profit margin, quarterly revenue growth of 6.6%, an operating margin of 14.40% and 8% quarterly earnings growth.
The only major concern is its overwhelming debt compared to cash: Currently, IBM is holding $10.78 billion in cash and more than twice that in debt.
One of the big concerns about the recent M&A boom is that once the dust settles, many of these companies will be in such extreme debt that their share prices will just drop away as investors walk from the market. But if they make the right M&A deals, that debt should be balanced by increasing revenue. In the case of IBM, I think this will be true.
It is really covering all its bases and investing smartly in its sector. IBM just signed an $84.4 million deal with Spanish renewable energy company Iberdrola (IBE:MCE) to “promote IT innovation” in Spain. In terms of globalization, it recently announced a $354 million contract with Italian Bank Gruppo Monte Paschi Siena (not public) to provide IT services to its operations.
It also agreed to buy Telelogic AB (TLOG:STO) for $745 million, a company that develops and tests software for the defense and automotive industry, both strong sectors to be part of going forward. It also purchased Watchfire Corp. (not public), a security software company, and a few days ago announced intentions to buy DataMirror Corp. (DMC:TSE), a Canadian real-time data software company.
IBM has made 43 software company acquisitions since 2001 and plans to continue aggressively seeking smaller companies to absorb, resulting in software contributing to half its profits by 2010.
You really can’t beat that projection.
Even at such a high price, I still consider IBM a good investment. Heck, high prices don’t seem to be deterring investors in this rally. Just look at MasterCard Inc.’s (MA:NYSE) run for evidence.
For the near term, I’d watch IBM closely since it looks like it’ll correct to support to fill in Wednesday’s over-exuberant gap… you should be able to get in a few dollars cheaper in the next few days.
I would look for IBM to surpass $140 per share in the next eight months, after final fiscal year results are reported.
Ann
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