Most of Lenovo’s current success can be attributed to IBM, which sold its personal computer business to the Beijing, China-based company for $1.25 billion back in 2005. Adding physical servers to its product line would make it a serious threat in the enterprise world to Hewlett-Packard Company (NYSE:HPQ). Lenovo has increasingly gained ground against HP in the personal computers business over the past few years with its ThinkPad products.
Shedding its server business would make sense for IBM, since the division has posted annual declines in revenue ever since 2008, which offset gains from its higher-margin IT software and services segments. Considering that IBM’s sale of its personal computer segment to Lenovo came right before the PC industry crashed, I think investors should trust IBM’s decision.
IBM investors should simply look at Hewlett-Packard’s current dire state to see where Big Blue would have ended up if it hadn’t shed its personal computers business.
Of course, HP was also weighed down by leadership changes and terrible acquisitions such as EDS, Palm and Autonomy. Meanwhile, IBM made focused decisions toward longer-term goals, and shifted with the changing tides of technology while HP simply got swept away. For the full year, IBM expects to earn $16.70 per share, a 9.5% gain from the previous year, and in line with analyst estimates.
Global growth
By region, IBM’s revenue declined 7.9% to $5.7 billion in the Asia-Pacific region, and also dropped 4.0% in the Americas to $10.0 billion. Revenue from the EMEA (Europe, Middle East, Africa) region also slid 4.0% to $7.3 billion.
IBM’s decline in emerging markets, such as the BRIC (Brazil, Russia, India, China) markets was particularly disappointing. The company’s average revenue from BRIC markets slid 1.0% during the quarter.
Rising margins, declining expenses
IBM’s GAAP adjusted gross margin grew 60 basis points to 45.6%, which the company attributed to a favorable revenue mix and more efficient productivity. Meanwhile, total expenses dropped 4.4% to $6.85 billion. SG&A (sales, general & administrative) expenses dropped 6.7%, but R&D (research & development) expenses rose 1.4%.
From this chart, we can see that the quarter’s results are a continuation of a longer-term trend of rising margins and declining expenses. This contributed to the company’s strong cash position of $11.99 billion at the end of the quarter, up from $11.33 billion a year ago. However, free cash flow from operations declined slightly from $1.87 billion to $1.70 billion.
The Foolish Bottom Line
Fundamentally, IBM is still one of the strongest names in IT software and services.
10.40 | 2.21 | 84.67% | 175.25 | 15.89% | 1.60% | |
5.54 | 0.33 | -41.00% | 121.28 | -10.86% | 2.60% | |
12.19 | 0.26 | 22.81% | 12.36 | 1.72% | N/A | |
| Advantage | HP | Lenovo | IBM | Lenovo | IBM | HP |
Source: Yahoo Finance, April 19
IBM has the strongest margins of these three companies, simply because it sells much less lower-margin hardware than its peers. The company also trades with a low P/E for a big blue chip tech company, especially when compared to the industry average of 14.75.
Investors obviously should steer clear of Hewlett-Packard’s sinking ship, which is now being dragged under by mediocre Windows 8 sales and soaring demand for tablets. Lenovo, which trades on the pink sheets, is a viable higher growth alternative to HP, and offers several popular Android tablets.
Despite these strengths, IBM’s biggest threat is the global economy. If Europe continues to struggle and China slows down further, then IBM could experience very little growth in 2013. However, IBM is a safe low-beta stock that will likely rise again once these problems finally end.
The article Is it Time to Buy IBM? originally appeared on Fool.com and is written by Leo Sun.
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