IBM Report

talkassistantSoftware and s/w Development

Oct 30, 2013 (4 years and 2 months ago)

106 views


1



We currently hold 250 shares of IBM worth $30,410,
approximately

2.8% of our portfolio. My recommendation is
that we bu
y IBM and increase our pos
ition to 5% of our
portfolio. IBM
features a strong product portfolio with
customers in a variety of industries, a history of innovation, and
a solid financial position with a history of sales and profit
growth.

IBM is the world’s

largest IT company based on revenue
with over 380,000 employees worldwide. The company has a
presence in over 170 countries with 65% of revenues coming
fro
m outside of the United States. In the past 10 years IBM has
transformed itself from a major player
in the PC industry to the
industry leader in IT with prudent strategic investments and
acquisitions. IBM’s business is to make business more efficient
and streamlined through integrating all aspects of a company. A
business model perfectly suited to take a
dvantage of the new
global economy.

IBM has continued their trend of double digit earnings per
share growth so far into 2009, while also raising their
expectations for 2010. The company has been able to increase
their net income despite negative growth in
sales for 2009
through an increased focus on cost effectiveness and further
integration. While growing the bottom line while losing sales is
not sustainable for long periods of time I believe that this is only
temporary. I expect that as the economy recove
rs IBM will
again see an increase in sales as their services will be needed
more than ever in a world that demands greater efficiency. This
coupled with their ability to lower costs in 2008 I believe
will
lead to higher earnings in 2010 but also help them
beat analyst
expectations for 2010, as they were able to do for 2008 and so
far in 2009.

One point of concern with IBM is that they do carry more
long term debt than is desirable, but much of this was taken on
recently when interest rates were favorable. I

see this as a smart
move to take advantage of very low cost of debt that they will
be able to use to create value for the company. With all of these
factors I recommend a strong buy of IBM for our portfolio.






Ticker
:

IBM

Sector
:

Technology

Industry
:

Diversified Computer
Systems



Recommendation:

BUY



Pricing

Closing Pri
ce

$
121.64

(10/18/09
)

52
-
wk

Hi
gh

$128.61


(10/14/09)

52
-
wk
Low

$69.50

(11/21/08)




Market Data

Market Cap

$159.46B

Total a
ssets

$103.65B

Trading v
ol

6.94M

(3mon avg)



Valuation

EPS (ttm)

$9.37

P/E (ttm)

12.98

PEG

1.32

Div Yield

1.80%



Profitability & Ef
fectiveness (ttm)

ROA

10.06
%

ROE

57.96%

Profit Margin

13.00
%


Oper Margin

18.59
%

Gross Margin

53.06
%















Shane Blase

Shane.blase@gmail.com


2

Company Description
1


IBM
creates busines
s value for clients and solves business problems through integrated
solutions that leverage information technology and deep knowledge of business processes. IBM
solutions typically create value by reducing a client’s operational costs or by enabling new
ca
pabilities that generate revenue. These solutions draw from an industry leading portfolio of
consulting, delivery and implementation services, enterprise software, systems and financing
.


Corporate Strategy
2


In IBM’s view, today’s networked economy has cr
eated a global business landscape and
a mandate for business change. It also opens the opportunity to upgrade the efficiency and
effectiveness of the global infrastructure through embedded information technology


what
IBM calls a “smarter planet.” Smart a
irports, smart highways, smart supply chains are all
possible. IBM is working with clients and governments around the world to explore these
opportunities and implement new ideas.

Integrated global economies have opened markets of new opportunity and new s
ources of
skills. The Internet has enabled communication and collaboration across the world and brought
with it a new computing model premised on continuous global connection. In that landscape,
companies can distribute work and technology anywhere in the
world. IBM continues to adjust
its footprint toward emerging geographies, tapping their higher growth, providing the technology
infrastructure they need and taking advantage of the talent pools they provide to better service
the company’s clients
.

IBM’s st
rategy addresses this new era and delivers value to its clients
through three strategic priorities:



Focus on Open Technologies and High
-
Value Solutions

A new computing model has emerged, replacing the PC
-
based, client/server approach. This new
model is n
etworked, modular, open and represents a fundamental shift in the technology
requirements of the company’s clients. IBM is well positioned to provide its enterprise clients
the open technologies and high
-
value solutions they will need to compete.



IBM is le
veraging its leadership position in the convergence of software and services, in service
oriented architecture (SOA), in virtualization, in business intelligence and analytics, in open and
modular information technology (IT)


continuing its shift from com
moditizing segments to higher
value segments with better profit opportunity.



The company continues to be a leading force in open source solutions to enable its clients to
achieve higher levels of interoperability, cost efficiency and quality.

Deliver Integ
ration and Innovation to Clients

Changes in the market have caused IBM’s clients to seek flexibility and innovation in everything
from technical architecture to their business model. In response, IBM is focused on delivering
integration and innovation to i
ts clients


offering them technologies and services that support
real value creation.




1

IBM 2008 Annual report/10
-
k

2

IBM 2008 Annual report/10
-
k


3



IBM has a long heritage of transforming the business operations of large enterprises and has
earned the trust to be their innovation partner and global integrator.



The c
ompany has an extensive set of global assets and capabilities it is applying to improve
services profitability, both for its clients and for itself.

Become the Premier Globally Integrated Enterprise

As global networks and technology capabilities change bus
iness economics, legacy business
designs can quickly become noncompetitive. IBM believes a globally integrated enterprise,
designed for this new landscape, can compete effectively and will benefit from the opportunities
offered.



To reshape its business for

the global economy, IBM has replaced vertical hierarchies with
horizontally integrated teams.



Across the business, the company has made significant investments in emerging markets, taking
core processes and functions that were once managed regionally and
shifting them to a globally
integrated model.

Business Segments

The company’s major operations
are comprised of: a Global Tech
nology Services
segment; a Global Business Services segment; a Software segment; a Systems and Technol
ogy
segment; and a Global Fi
nan
cing segment.

Global Services is a critical component of the company’s strategy of providing IT infrastructure
and business insight and solutions to clients. While solutions often include industry
-
leading IBM
software and hardware, other suppliers’ prod
ucts are also used if a client solution requires it.
Within Global Services there are two reportable segments: Global Technology Services and
Global Business Services.

Global Technology Services (GTS)

primarily provides IT infrastructure services and busin
ess
process services, delivering business value through the company’s global scale, standardization
and automation
.

GTS CAPABILITIES



Strategic Outsourcing Services.

Comprehensive IT services integrated with business insight
working with clients to reduce c
osts and improve productivity through the outsourcing of
processes and operations.



Integrated Technology Services.

Services offerings that help clients access, manage and support
their technology infrastructures through a combination of skilled resources,
software and IBM’s
knowledge of business processes. The portfolio includes Service Product Lines which
complement hardware from Systems and Technology and software offerings from the Software
business.



Business Transformation Outsourcing.

A range of offeri
ngs from standardized processing
platforms and Business Process Outsourcing through transformational offerings that deliver
improved business results to clients through the strategic change and/or operation of the client’s
business processes, applications
and infrastructure.



Maintenance.

A number of support services from product maintenance through solution support
to maintain and improve the availability of clients’ IT infrastructure.

Global Business Services (GBS
)

primarily provides professional services
and application
outsourcing services, delivering business value and innovation to clients through solutions which
leverage industry
-

and business
-
process expertise.

GBS CAPABILITIES


4



Consulting and Systems Integration.

Delivery of value to clients through c
onsulting services for
client
-
relationship management, financial management, human
-
capital management, business
strategy and change, and supply
-
chain management.



Application Management Services.

Application development, management, maintenance and
support
services for packaged software, as well as custom and legacy applications. Value is
delivered through the company’s global resource capabilities, industry knowledge and the
standardization and automation of application development.

Software


Consists prima
rily of middleware and operating systems software. Middleware software
enables clients to integrate systems, processes and applications across a standard software
platform. IBM middleware is designed to open standards which allows the efficient integration

of disparate client applications that may have been built internally, or provided by packaged
software vendors or system integrators. Operating systems are the software engines that run
computers. Approximately two
-
thirds of external software segment reve
nue is annuity
-
based,
coming from recurring license charges and ongoing subscription and support from one
-
time
charge (OTC) arrangements. The remaining one
-
third of external revenue relates to OTC
arrangements, in which the client pays one up
-
front payment

for a perpetual license. Typically,
arrangements for the sale of OTC software include one year of maintenance. The client can also
purchase ongoing maintenance after the first year, which includes product upgrades and
technical support.

SOFTWARE CAPABILIT
IES



WebSphere Software.

Management of a wide variety of business processes using open
standards to interconnect applications, data and operating systems. Provides the foundation for
Web
-
enabled applications and is a key product set in deploying an SOA.



Inf
ormation Management Software.

Advanced database, content management, information
integration and business intelligence software that helps companies integrate, manage and gain
value from their business information.



Tivoli Software.

Software for infrastruct
ure management, including security and storage
management that will help organizations better manage their IT infrastructure to more effectively
deliver IT services.



Lotus Software.

Collaboration, messaging and social networking software that enables
busin
esses to communicate, collaborate and increase productivity.



Rational Software.

Software tools that help clients manage their software development processes
and capabilities. With the acquisition of Telelogic in 2008, Rational software supports software
de
velopment for both IT solutions and embedded system solutions.



Operating Systems.

Software that manages the fundamental processes that make computers
run.

Systems and Technology


provides clients with business solutions requiring advanced computing power a
nd storage
capabilities. Approximately 55 percent of Systems and Technology’s server and storage sales
transactions are through the company’s business partners; approximately 45 percent are direct to
end
-
user clients. In addition, Systems and Technology pr
ovides leading semiconductor
technology and products, packaging solutions and engineering technology services to clients and
for IBM’s own advanced technology needs.

SYSTEMS AND TECHNOLO
GY CAPABILITIES



Servers.

IBM systems, which are typically connected to

a network and provide the required
infrastructure for business. These systems use both IBM and non
-
IBM operating systems, and all
IBM servers can also run Linux, a key open source operating system. (System z, legacy System i,
converged System p and System

x).



Storage.

Information infrastructure products and solutions, which address critical client
requirements for information retention and archiving, availability and virtualization, and security

5

and compliance. The portfolio consists of a broad range of di
sk and tape storage systems and
software.



Microelectronics.

Semiconductor design and manufacturing primarily for use in IBM systems and
for sale to external clients (OEM).



Retail Store Solutions.

Point
-
of
-
sale retail systems (network connected cash registe
rs) as well as
solutions which connect them to other store systems.

Global Financing

GLOBAL FINANCING CAP
ABILITIES



Client Financing.

Lease and loan financing to end users and internal clients for terms generally
between two and seven years.



Commercial Fina
ncing.

Short
-
term inventory and accounts receivable financing to dealers and
remarketers of IT products.



Remarketing.

The sale and lease of used equipment (primarily sourced from the conclusion of
lease transactions) to new or existing clients.


Financial
Performance




As the global leader in IT services IBM has impressive sales and net income numbers,
with 2008 being record years for both. In 2008 IBM reported total sales of $103.6 billion with
net income of
$12.33 billion, both records for the company. I
n today’s business world efficiency
is more important than ever, making the demand for IBM’s products and services higher than
ever. In addition IBM is not overly dependent on any one of their five business segments for
their revenues. Global Technology Se
rvices leads the way with 38% of total sales



Through their five business segments IBM has truly become a one stop shop for all of a
business’ IT needs. The Global Financing segment is not a financial products division. This
segemnt is limited solely to
providing financing to customers for large orders. The Global
Financing segment is very profitable with a gross magin of 51.30%, when we see a recovery in
the economy this segment could
see significantly higher sales. Over the past five years the
company h
as increased their presence in the software market, boasting a gross margin of 85.40%
this move is part of the company’s focus to shift their attention to more profitable business’.


6



As the chart above indicates the software business provides the highes
t levels of
profitability for the company. IBM is committed to improving and expanding their line of
software through internal research and develoment with over $6 billio
n in R&D expenditures for
2008. IBM has boosted their overall product mix, most notabl
y in the software segment, not only
with internal R&D bust also through a series of acquisitions. IBM has made over 100
acquisitions in the last decade with more than 70% for software and services.
3

Risk Factors


The largest risk factor for IBM is the comp
etitive landscape of the IT business. IBM
competes with companies such as Hewlett Packard, Oracle, and Microsoft. Also Dell is
beginning to follow the same strategy that IBM and Hewlett Packard have used by diversifying
into services with their acquisition

of Perot Systems
Inc
.

Increased competition could take away
market share from IBM in all business segments as well as decrease margins to meet new prices.
As a truly global company another risk to IBM is the rate of recovery in the overall global
economy,

as well as the stability and value of the US dollar.
Recent news of involvement in an
insider trading scheme by IBM’s Senior Vice President of Systems and Technology Group
Robert Moffat Jr and the fallout associated with it could have a potential negative

impact at the
company. The full details of the allegations are not yet known as well as how it could affect the
company but regardless it can create an issue of negative publicity for IBM.


Looking at their balance sheet we see that IBM does carry a sign
ificant amount of long
term debt at over $20 billion for the most recent quarter and carrying a current ratio of only 1.21
.
I do not believe that their level of debt is a large cause for concern as the company has
consistently generated enormous operating
cash flows while also holding a considerable amount
of treasury stock.







3

IBM 2008 Annual report/10
-
k


7




Stock Performance




IBM has outperformed the S&P 500 by
a wide margin over the last year. The company
has seen total sales decrease in 2009 only to see net income increase. IBM has used the economic
downturn to focus on becoming more efficient and reduce costs as much as possible, to remain
highly profitable ev
en in a down economy. I feel that this increased efficiency will benefit the
company greatly going into the recovery. When corporate spending returns to previously
expected levels coupled with lower costs could provide IBM with another record
breaking

year

in earnings.


8



The IT business is extremely competitive, with IBM’s extensive product portfolio they
are competing with a varie
ty of firms that each participates in a market IBM is in. Hewlett
Packard has dramatically reshaped their business over the past five years closer to the model that
IBM has set for their future. With Oracles recent purchase of Sun Microsystems IBM’s market

share in the server market will be tested, as this merger creates a very strong competitor
. IBM is
strongly committed to research and development, receiving more than 4000 patents in 2008, with
their level of commitment along with their history of creatin
g productive and profitable
intellectual property I believe that IBM will continue to be the world’s leading IT company.

Valuation


For my valuation of the stock I used a five year discounted cash flow model to
approximate a fair price.

I used a risk free
rate of .0008% (90 day t
-
bill), I calculated a beta of
.94 (the average of 1.15 from Yahoo, .85 from CNBC, and .81 from Thompson Reuters). Using
the Capital Asset Pricing Model I calculated a discount rate of 9.4%. IBM has very strong
operating cash flows
and a credit rating of A+ from S&P but given the current credit markets and
economic conditions I felt that this was too low for the time, but not unreasonable during
economic expansions. For my valuation I used a more conservative discount rate of 11%
. Us
ing
this discount rate along with the 10% expected first stage growth rates from analysts I came to a
fair value price of $145.39, approximately 20% higher than closing price of $121.64 from Friday
October 16
th
. I believe that this is a very fair valuation

given their great product line and their
ability to increase their margins during this past year. Below I have included my sensitivity
analysis for both optimistic and pessimistic scenarios.




9

First Stage Growth (all calculations feature 3% terminal grow
th)

Discount Rate

6%

8%

10%

12%

14%

9%

$176.35

$184.96

$193.88

$203.11

$212.67

10%

$151.35

$158.53

$165.97

$173.68

$181.65

11%

$132.90

$139.04

$145.39

$151.97

$158.78

12%

$118.62

$123.94

$129.46

$135.16

$141.07

13%

$107.23

$111.9
1

$116.76

$121.78

$126.97






5 year Income comparison


($ in millions except per share amounts)

For the year ended

December 31:

2008

2007

2006

2005

2004

Revenue

$
103,630

$
98,786

$
91,424

$
91,134

$
96,293

Income f rom
continuing
operations

$
12,334

$
1
0,418

$
9,416

$
7,994

$
7,497

Income/(loss) f rom
discontinued
operations



(00)

76

(24)

(18)

Income before
cumulative effect
of change in
accounting
principle

12,334

10,418

9,492

7,970

7,479

Cumulative effect
of change in
accounting






(36)




10

($ i n mi l lions except per share amounts)

For the year ended

December 31:

2008

2007

2006

2005

2004

principle
*

Net income

$
12,334

$
10,418

$
9,492

$
7,934

$
7,479

Earnings/(loss) per
share of common
stock:











Assuming
dilution:











Continuing
operations

$
8.93

$
7.18

$
6.06

$
4.91

$
4.39

Discontinued
operations



(0.00)

0.05

(0.01)

(0.01)

Bef ore
cumulati
ve ef f ect
of change in
accounting
principle

8.93

7.18

6.11

4.90

4.38

Cumulative
ef f ect of change
in accounting
principle*







(0.02)



Total

$
8.93

$
7.18

$
6.11

$
4.87

$
4.38

Basic:











Continuing
operations

$
9.07

$
7.32

$
6.15

$
4.99

$
4.48

Discontin
ued
operations



(0.00)

0.05

(0.02)

(0.01)

Before
cumulative effect
of change in
accounting
9.07

7.32

6.20

4.98

4.47


11

($ i n mi l lions except per share amounts)

For the year ended

December 31:

2008

2007

2006

2005

2004

principle

Cumulative
ef f ect of change
in accounting
principle*







(0.02)



Total

$
9.07

$
7.32

$
6.20

$
4.96

$
4.47

Cash dividends
paid o
n common
stock

$
2,585

$
2,147

$
1,683

$
1,250

$
1,174

Per share of
common stock

1.90

1.50

1.10

0.78

0.70

Investment in
plant, rental
machines and
other property

$
4,171

$
4,630

$
4,362

$
3,842

$
4,368

Return on
stockholders’
equity**

48.8%

42.7%

29.3%

25.6%

25.6
%

At December 31:

2008

2007

2006

2005

2004

* Refl ects i mpl ementation of FASB Interpretation No. 47, “Accounting for Conditional Asset Reti rement Obligations.”

** Restated to conform wi th 2008 presentation usi ng a fi ve
-
quarter average for stockhol ders’ e
qui ty.

Total assets

$
109,524

$
120,431

$
103,234

$
105,748

$
111,003

Net investment
in plant, rental
machines and
other property

14,305

15,081

14,440

13,756

15,175

Working capital

6,568

8,867

4,569

10,509

7,357

Total debt

33,926

35,274

22,682

22,641

22,927

Stockholders’
equity

13,465

28,470

28,506

33,098

31,688



12


Balance Sheet


($ i n mi l lions except per share amounts)

At December 31:

Notes

2008

2007

* Recl assi fi ed to conform wi th 2008 presentation of deferred taxes, previ ousl y combined i n i nvestments an
d sundry
assets.

The accompanying

notes

are an i ntegral part of the fi nancial statements.

ASSETS







Current assets:







Cash and cash equivalents



$
12,741

$
14,991

Marketable securi
ties

E

166

1,155

Notes and accounts receivable


trade (net of allowances of $226 in
2008 and $241 in 2007)


10,906

11,428

Short
-
term financing receivables
(net of allowances of $351 in 20
08
and $296 in 2007)

G

15,477

16,289

Other accounts receivable (net of
allowances of $55 in 2008 and $13
in 2007)


1,172

1,072

Inventories

F

2,701

2,664

Deferred taxes

P

1,542

1,687

Prepaid expenses and other
current assets


4,299

3,891

Total current assets


49,004

53,177

Plant, rental machines and other
pr
operty

H

38,445

38,584

Less: Accumulated depreciation

H

24,140

23,503

Plant, rental machines and other
property


net

H

14,305

15,081

Long
-
term financing receivables
(net of allowances of $179 in 2008
and $58 in 2007)

G

11,183

11,603

Prepaid pe
nsion assets

U

1,601

17,417

Deferred taxes*

P

7,270

1,513

Goodwill

J

18,226

14,285

Intangible assets


net

J

2,878

2,107

Investments and sundry assets*

I

5,058

5,248


13

($ i n mi l lions except per share amounts)

At December 31:

Notes

2008

2007

TOTAL ASSET
S


$
109,524

$
120,431


LIABILITIES AND
STOCKHOLDERS’ EQUITY







Current liabilities:







Taxes

P

$
2,743

$
3,673

Short
-
term debt

K
&
L

11,236

12,235

Accounts payable


7,014

8,054

Compensation and benef its


4,623

4,645

Def erred income


10,239

9,802

Other accrued expenses and
liabilities



6,580

5,901

Total

current liabilities



42,435

44,310

Long
-
term debt

K
&
L

22,689

23,039

Retirement and nonpension
postretirement benefit obl
igations

U

19,452

13,582

Deferred income



3,171

3,060

Other liabilities

M

8,311

7,970

TOTAL LIABILITIES



96,058

91,962

Contingencies and Commitments

O



Stockholders’ equity:

N



Common stock, par value $.20 per
share and additional paid
-
in

capital


39,129

35,188

Shares authorized: 4,687,500,000







Shares issued (2008


2,096,981,860;

2007


2,057,607,421)







Retained earnings


70,353

60,640

Treasury stock, at cost (shares:
2008


757,885,937;


2007


672,373,283)


(74,171)

(63,945
)

Accumulated gains and (losses)
not affecting retained earnings

N

(21,845)

(3,414)

TOTAL STOCKHOLDERS’
EQUITY


13,465

28,470

TOTAL LIABILITIES AN
D
STOCKHOLDERS’ EQUITY


$
109,524

$
120,431




14