IBM deserves some excitement, at least

Analysis: Big Blue isn’t a legacy firm; it’s the top gainer on the Dow

SAN FRANCISCO (MarketWatch) — Years ago, one of International Business Machines Corp.’s most memorable ads simply was the word “think.”

Big Blue might want to consider reviving that campaign, this time amending it to be “think, at least” — as in “think, at least, before lumping us in with the industry’s legacy dinosaurs.”

There’s no point in denying it: IBM
IBM, +0.70%
doesn’t elicit the excitement that emanates from other rock-star companies in the tech sector. For example, depending on what day of the week it is, Apple Inc.
AAPL, +1.63%
is the most valuable company in the world because it plays upon consumers’ wants and desires for products they never thought they needed.

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Meanwhile, the impression among much of the public is that IBM has become even more entrenched with its core business customers, selling the not-too-flashy servers and storage devices, along with the software and services, that run much of the world’s back-end computing operations.

But that’s not the whole picture. Looking at IBM that way would be “like comparing apples and oranges,” according to David Grossman of Stifel Nicolaus.

“IBM is a totally different play,” he said. “It’s very good at creating new markets for itself.” Grossman has a buy rating on IBM’s stock.

The analyst points out that years ago IBM recognized, more than any other company in its category, that its enterprise-computing market was maturing. Business would contract, and it would need to look at other areas for growth.

So began IBM’s era of divestment, getting out of commodity businesses such as printers, PCs and most recently, computer hard drives. Hardware now makes up less than 10% of income before taxes at IBM.

Over the last few years, the company has moved heavily into the fast-growing market for business-analytics software, with acquisitions such as its $5 billion deal for Cognos in 2008, the $1.2 billion buy of SPSS in 2009 and its September 2010 acquisition of Netezza for $1.7 billion.

“More than anything, that defines how they look at their business relative to their peers,” Grossman said. “They buy companies that play into these growth markets and are heavily invested in these nontraditional IT markets.”

IBM may not get lines of aficionados around the block like a new iPhone. But it has been doing enough to see its stock reach an all-time high of $190.53 on Oct. 14. The company is also the biggest gainer on the Dow Jones Industrial Average
DJIA, +0.72%
this year, with shares rising more than 21%; the stock is also up 29% over the last 12 months.

That’s even with the hit that IBM took on Tuesday, when investors knocked the shares down by 4% following third-quarter results that basically met Wall Street’s expectations, but still showed signs of slowing growth. For example, IBM said it signed $12.3 billion in new services contracts. While that was up 6% from a year ago, it fell shy of analysts’ consensus forecasts of $12.5 billion in signings. Read more about investors’ reaction to IBM’s results.

IBM’s report may have raised concerns about the market for corporate IT spending, yet the company still raised its operating earnings forecast for 2011 to, as it said, “at least” $13.35 a share from a minimum of $13.25 a share.

“The results are an overall sign of stability,” said Joseph Foresi, of Janney Capital Markets, who has a buy rating on IBM. He added that the expectations have gotten higher for IBM as its share price has climbed.

“The good news is that the long-term fundamentals remain intact,” Foresi commented. “[IBM] has proven it can deliver in tough times and stick to the road map even if it curves.”

That leaves us with the question just what is IBM these days, anyway?

Is it an 800-pound gorilla stomping recklessly across the tech landscape, eliminating competitors and grinding down innovation? Or is it like the elephant in the room, a giant that remains hunkered down in the corner that everyone tries to avoid, for fear of riling it up?

Or maybe it’s more like what Mike Huckabee called former Gov. Mitt Romney’s health-care plan — an 800-pound elephant.

That mixed metaphor might be the best way to look at IBM right now. At least.

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