Horacio Marquez
Contributing Editor
Money Morning/The Money Map Report

International Business Machines Corp. (NYSE: IBM) has “surprised” the market with flawless execution and strong profits.

A few months ago, I congratulated my nephew for getting an internship with IBM, while he studies business in Argentina.

“It is a superb global company, with a bullet-proof business model and a balance sheet that gives them a huge sustainable competitive advantage,” I said, advising him to use the opportunity to find his way to a permanent job with the company for after he graduates.

With its recent financial results, IBM made me look very prescient, and made my advice to my nephew look very shrewd, indeed. Despite the total meltdowns of the U.S. and global economies last October, IBM executed flawlessly and handily beat analysts’ earnings estimates, expanding both its margins and its profit outlook for 2009. And these two bottom-line-related improvements were made despite a slight drop in sales, which stemmed chiefly from the currency effects of an appreciating U.S. dollar.

The bottom line: IBM reported a 2008 fourth-quarter profit that was up 12% from the fourth quarter of 2007. The company earned $4.4 billion, or $3.38 a share, a result that was up 21% from the $2.80 a share from the year before. Analysts had expected IBM to earn only $3.03.  Total revenue was $27 billion, a slight decline from the $28.9 billion reported the year before.

Last Tuesday, IBM – also known as “Big Blue” – said it expects fiscal 2009 earnings of at least $9.20 per share. That’s nearly 5% better than the consensus estimate of $8.77, according to analysts surveyed by Reuters Estimates

This is just one more that Wall Street “surprisingly” got wrong.  In what has been a constant during this financial crisis, companies in industries ranging from steel to high tech have handily exceeded earnings estimates.

A notable exception, of course, has been the financials, where the companies saddled with subprime mortgages have been forced to mark down their portfolios to ridiculously low “market” prices (there is no market) on packaged securities that are trading at a fraction of their theoretical value. This, in turn, is affecting the equity of banks, and therefore their ability to lend.

In such an environment, many analysts adopted an “end of the world” scenario, where companies halt every possible activity in order to preserve cash.  So fund managers that went into premier high tech companies keep getting rewarded now, as these companies report, while their year-end performance metrics were distorted by Wall Street’s bearish bias.

Clearly, Wall Street’s extremely bearish perception is wrong, given the resiliency of the company’s business model.  The virtue of IBM’s model is that it has effectively transformed itself from the cyclical hardware company that gave it its name into a software-and-service-oriented firm that gives it a recurring revenue stream. In addition into this well-thought-out business model that concentrates on high-margin, value-added businesses.

Success with this strategy is due to IBM’s integrated approach to providing a total solution to its clients around the globe, which encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing..

That last issue – financing – is crucial these days. And IBM’s long history in the world’s markets has given the company a longtime of recognition abroad, which really helps mitigate competitive threats from unproven newcomers.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

Geographically, most of the growth continued to come from the so-called “BRIC” countries (Brazil, Russia, India and China), which grew at a 13% clip, and within the emerging markets, which as a whole grew at a 6% clip. Underscoring the soundness of IBM’s global business was the fact that growth was essentially flat for the hard-hit U.S. market. This geographic shift and segment emphasis resulted in higher profit margins, which have more than doubled, causing earnings per share to more than triple in the last six years.

IBM’s global services – which include global technology and global business services – accounted for 53% of fourth quarter sales, while software delivered 24% and systems-and-technology 20%.  Very importantly, new deal signings amounted to a robust $17.2 billion, which gives IBM a solid outlook for 2009.  This evidenced a 20% growth from strategic outsourcing.

What we have here is a solid-and-growing revenue stream, matched with 9% growth, even in software, and a solid outlook.

An area of vulnerability could be financial services, which accounted for 30% of the company’s business.  Fortunately, the U.S. market – which has suffered the most from the global-financial downturn – only accounts for about a quarter of this business. Another challenge is the more-cyclical segment of systems and technology – mainly servers and storage – mainly servers and storage, which accounts for about 20% of sales, experienced a 16% decline in revenue and a 6% decline in margins.

But margin growth of 4.8% and 5.6% in IBM’s much-larger global-technology-services and global-business-services business segments more than compensated for this, resulting in overall margin expansion of 3% from last year.

Most importantly, IBM has a bullet-proof balance sheet and a fantastic cash flow of $7.9 billion. In times when others are suffering, IBM keeps producing a steady and increasing cash flow, and this financial strength allows the company to provide financing to its customers and keep sales rolling in. This is key; it enables IBM to either cherry-pick business from damaged competitors or buy them outright at cheap valuations.

Hence, IBM’s business model has been precisely been retooled over many years to face moments like this and thrive. If there’s a business lesson here it’s that the strong and resilient not only survive, but run away with the market. IBM’s stable and recurring revenue, geographic diversification, focus on higher-value-added business, and financial strength grants it invaluable defenses against both economic and competitive threats.

Recommendation:  With the earnings surprise and the market’s sudden reversal, the shares of International Business Machines Corp. (NYSE: IBM) have rallied aggressively.  But the story is still intact.  What’s more, the many stimulus plans being implemented around the world will no doubt increase demand in many of IBM’s product-and-service areas. Even the huge consolidation in banking and other industries will boost demand for information-technology products and services.

Hence, the upside is still under-appreciated at the current valuation.  At a forward Price/Earnings (P/E) ratio of less than 10.0, and a Price/Earnings to Earnings Growth Rate (P/E to Growth Rate) ‘PEG ratio’ of about 1.0, the shares of this growing company with strongly reliable earnings deserves much higher multiples.  I would not be surprised to see IBM’s stock price going up by 50% over the next couple of years. Buy half a position right now and complete the remaining half by buying on days of market weakness before IBM’s next earnings report. Plan on putting the shares away for two years (**).

[Editor’s Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning’s hugely popular “Buy, Sell or Hold” series, and is also the editor of the longstanding “Money Moves Alert” trading service. For a free report detailing some of the profit opportunities that service has uncovered, please click here.]

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in IBM Corp.

News and Related Story Links:

• Reuters:
  IBM Corporation Issues FY 2009 EPS Guidance Above Analysts’ Estimates.

• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part I).

• Money Morning Special Investment Report:
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• Money Morning Buy, Sell or Hold:
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• Wikipedia:
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By Horacio Marquez
Contributing Editor
Money Morning/The Money Map Report

Although ABB Ltd. (ADR: ABB) has been around for 120 years, it’s one of those rare companies that’s kept current with the times. It continues to do so and those efforts are generating tangible results.
              
Indeed, as Money Morning noted in its July 7 overview of ABB, the Zurich-based industrial giant is a virtual lock to benefit from the many billions in stimulus money governments around the globe will be directing into such infrastructure-related areas as highway, construction and power-generation.

These promising opportunities remain.  In fact – with the $586 billion stimulus China unveiled in early November, and the $825 billion stimulus plan that President-elect Barack Obama is kicking around, ABB’s growth opportunities have probably actually been enhanced, because infrastructure projects and job-creation are at the core of both packages.

In late October, ABB reported strong earnings for its third quarter, beating analysts’ estimates, while reaffirming its strong growth guidance for the firm’s still-to-be-reported fourth-quarter results.

In its third-quarter report, for instance, ABB reported strong (23%) year-over-year revenue growth, as well as a hefty increase in operating-profit margins (as measured by EBIT, or earnings before interest and taxes) to a healthy 14.5%.

So why are we revisiting our earlier report? What’s changed since we last looked at ABB? No surprise here: It’s the increasing uncertainty over the timing of these opportunities, given the ongoing – and, at times, escalating – global financial crisis. ABB took special note of this in the management report that accompanied its third-quarter financial statement.

“It’s too early to say how the recent financial-market turmoil will impact our markets in the short term, but our operational strength and flexibility, leading technology, competitive cost base and solid balance sheet put us in a good position to meet a tougher market. We are on target to deliver on our 2008 growth guidance,” ABB said in a statement that day.

After I published my cautious “Buy” recommendation, ABB shares rallied about 4%, a move that peaked near the end of July – which is right about the time that the Lehman Brothers Holdings Inc. (LEHMQ) saga began exerting pressure on the stock market. That saga – which culminated with the brokerage firm’s Sept. 15 bankruptcy filing – precipitated an entire chain of events, which included the rescue of insurer American International Group Inc. (AIG), and widespread de-leveraging in the hedge-fund sector, all of which we’ve covered closely here in Money Morning.

By October, this financial collapse had evolved into a credit squeeze that paralyzed the world’s key economies – including the United States – in October. As the U.S. financial system ground to a halt, and as the effects reverberated across the world, growth projections for almost every country were revised downward and international-bank financing all but disappeared.  Financing is a key issue in long-term infrastructure projects, since many of those big-ticket jobs could get delayed if financing is not readily available.
                                                                                                                                                                
Thus, the financial crisis, has affected ABB’s stock price, both because of the forced de-leveraging and because of the downward revisions to estimated earnings per share. The stock came down from about $27 to a double-bottom low of $10 in October and November, and then rallied 50% to close the year at $15.01.

So what’s next for ABB’s shares?

For starters, the company is seeing a slowdown in large contracts: “Large project orders declined significantly, reflecting in part a comparison with a very strong quarter a year ago,” ABB stated when it reported its third-quarter results. “In addition, customers’ decisions on a number of industrial and infrastructure investments have been delayed as a result of the recent market uncertainty.”

ABB will be reporting its fourth quarter results on Feb. 12.  In late December, when it set the date for that report, ABB announced it would be taking a fourth-quarter provision of $850 million for anti-competitive price-fixing, for a legal provision for suspicious payments in the United States, as well as for a tax dispute, restructuring charges and asset impairment.  At the same time, however, the company announced it has found more than $1 billion in cost savings. That latter revelation is consistent with expected continued margin improvements, a conclusion reached in our earlier “Buy, Sell or Hold” column.

Although some issues of concern have arisen, there are a number of mitigating factors. These positive factors might even turn the story completely around in short order and will definitely be a huge plus in years to come.

As the company stated above, ABB has a number of very strong positives working in its favor. Sales in emerging economies outpaced sales in advanced economies for the first time in the company’s history in 2008. The afore-mentioned $586 billion China stimulus is heavily focused on infrastructure projects, as well as consumer spending (For an excellent overview of the overall investment opportunities China presents, take a look at my colleague Don Miller’s recent “Money Morning Outlook 2009 Series” installment on China. To read that report, which is free of charge, please click here).

But this infrastructure theme is not limited only to China. It’s a common threat that runs through virtually all the stimulus plans announced by countries all around the world in recent months. Even President-elect Barack Obama, in unveiling his own stimulus plan, made it clear that infrastructure will be a central component of his job-creating stimulus plan. One key goal: The modernization of the aging-and-inefficient U.S. energy grid.

Europe’s infrastructure is likewise old and in dire need of a major makeover. And emerging economies such as India, Brazil and Chile will continue to use their new-found wealth to stimulate their economies by staying on course with their ambitious infrastructure plans.

There’s an important point to understand here. Anytime major infrastructure investments are planned, investors can be assured that major investments in power-generation and power-transmission will be a central element of the billions in economic infusions. It has to be that way. You see, investments in power generation (and transmission) have a direct correlation with gross domestic product (GDP) growth. What’s more, as much as 90% of the world’s growth this year will come from emerging economies around the world – markets that are already driving sales for ABB.

For example, Chile’s stabilization fund has reached some $24 billion dollars, or 14% of GDP.  This type of savings by countries that pursued sound economic policies during healthy periods is now enabling those same countries to mitigate the effects of the worldwide financial crisis, even as they continue to grow.

There are relatively few emerging markets to totally steer clear of, although Argentina is certainly one to be avoided.

In sum, while the financial disruptions have slowed down the pace of infrastructure spending, stimulus packages are keeping those projects from disappearing completely – and are perhaps even serving to stretch them out.

ABB may be one of the few companies positioned to benefit from all these trends. The company has a bullet-proof balance sheet, strong margins and solid cash flow. These strengths will mitigate the fallout from the financial crisis and over the long haul will keep propelling this giant to higher profits.  The market has already discounted the slowdown, but has not discounted the cost-cutting efforts, whose details have been sketchy so far.  We continue to be very upbeat about ABB’s prospects and will look at any market weakness in the year’s first half as a buying opportunity.

Action to take:  Buy shares of ABB Ltd. (ADR: ABB). The stock has been buoyed in anticipation of the so-called “January Effect,” although the U.S. stock market has badly misbehaved since then (**).

Given the uncertainty, if you haven’t already established a position in ABB shares – as I urged in my prior column – then I would split my purchases so that they are made before and after the mid-February earnings report. But I would not “chase” it, and I would save some cash in order to possibly add the last 20% towards the end of the first quarter, as visibility about the U.S. and Chinese infrastructure plans improves, and as the company’s legal hassles become more clear.

[Editor’s Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning’s hugely popular “Buy, Sell or Hold” series, and is also the editor of the longstanding “Money Moves Alert” trading service. For a free report detailing some of the profit opportunities that service has uncovered, please click here.]

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in ABB Ltd.

News and Related Story Links:

• Money Morning Buy, Sell or Hold:
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• Money Morning Economic Outlook 2009 Series Archive:
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• Money Morning Economic Outlook 2009 Series:
  China’s Red Dragon Turns Financial Crisis into Opportunity.

• Money Morning News Analysis:
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• Money Morning Week Ahead Column:
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• Money Morning News Analysis:
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• Money Morning News Analysis:
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• ABB Corporate Press Release:
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By Horacio Marquez
Contributing Editor
Money Morning

Research in Motion Ltd. (Nasdaq: RIMM) – maker of the ubiquitous BlackBerry – is likely to consolidate and increase its market share.

Almost all of our “Buy, Sell or Hold” recommended stocks started out on the right foot here in the New Year.  And our strategy of building up a position gradually up to year-end – to avoid the downward pressure of tax-loss selling, and other volatility – seems to have worked. This has left some cash on the sidelines to take advantage of any sell-offs that are sure to come in the first quarter.

In this environment, plagued with uncertainties, we are going to focus on companies that have bulletproof balance sheets (meaning they require no outside financing), enjoy a sustainable competitive advantage, regularly record high profit margins, and execute their strategies well.

The Waterloo, Ontario-based Research in Motion meets all of these requirements and pops up in our quantitative and qualitative screens prominently. And it helps a lot to have seen this Canadian company handily beat its third-quarter results.

RIMM has a solid, highly defensible franchise in its core market, the enterprise mobile phone segment. You see, the Blackberry line of smartphones has become the “must-have” gadget of managers in Corporate America. And not just because it’s a cool sign of corporate status – the phones are true productivity enhancers among corporate systems managers.

I called the experts just to verify this.  First, I queried a friend who runs systems for a Fortune 50 firm. For obvious reasons, my friend requested anonymity, both individually and for the company.

“If I had to implement a system now, the BlackBerry is the safest choice,” my friend explained.

And because the BlackBerry was specifically designed for this audience – a lucrative market segment – the device features many capabilities that just aren’t available in competing products. And if they are available, the features aren’t as well integrated into those rivaling devices.

To further buttress my research, I also called my good friend Brenda Lewis, a principal with the Greenwich, CT-based Transactions Marketing Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.

Lewis is an independent thinker and isn’t “married” to any particular technology, and she was equally bullish: “RIMM has been innovative – ahead of IT officers’ requirements in security and in their ability to accommodate corporate applications.”

And not only did she confirm the technological edge and superior capabilities that the Blackberry platform has over the competition, she went on to elaborate on a market rumor that has been going around for some time – that Microsoft Corp. (Nasdaq: MSFT) will buy RIMM.

“The probability of Microsoft acquiring RIMM is exceptionally low,” Lewis said.

I am not sure I concur, since the Windows and Blackberry market shares would comprise a very small percentage of the overall market.  Earlier in 2008 the market shares were:


“lack of personal discretionary income in most markets.”
She was right.  Subsequently, industry researcher Gartner Inc. (NYSE: IT) predicted that global sales of mobile phones would dip between 1.0% and 4.0% – even with 308 million mobile phones being shipped in the third quarter. Gartner’s forecast was consistent with a forecast by IT researcher IDC.  IDC predicted a drop of more than 2% globally, despite a pickup 9.0% sales pickup in smartphones for 2009.

But even in a generally cautious environment for wireless devices, this pickup in smartphone sales bodes well for the rulers of the space: Apple Inc. (Nasdaq: AAPL) and Research in Motion. Apple had been outpacing RIMM in sales the quarter before, but RIMM’s launching of three new “must have” Blackberry models should pay some major dividends. The BlackBerry Storm – RIMM’s first touch-screen smartphone – is a direct counterpunch to Apple’s iPhone 3G, which allegedly poses some security risks that become problematic in the corporate environment.  And the Storm, together with the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 will probably propel RIMM as the major market share gainer in the market in the current quarter, as evidenced by the success of the Storm on Black Friday.

In fact, with this early success already well underway, RIMM projected a large increase in revenue this quarter, to as much as $3.3 to $3.5 billion.  Both Apple and RIMM trail mobile device king Nokia Corp. (NYSE ADR: NOK) in market share. With its focus on the consumer – and not the corporate – market, Nokia leads the world with a 40% market share in the smartphone market, followed by Apple with 17% and Research in Motion with 15%.  So the bottom line for both Apple and RIMM is that they will gain market share from Nokia and other makers in a smartphone market that is growing at a 9.0% annual clip.
Research in Motion is poised to do very well for the follow reasons:

• It’s selling into a market segment that’s continuing to grow at a hefty single-digit pace.
• It is technologically dominant in the big-spending corporate market.
• It stands to boost its market share in both the overall smartphone segment and in the corporate segment.
• It has three new models on the market in the BlackBerry Storm the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 – which should enable it to snag additional market share.

All in all, these factors and others should enable Research in Motion should do well in this quarter, and throughout this year in general – despite the negative developments in the global economy.

RIMM shares bottomed at about $36 on Dec. 3, the day it downgraded its outlook. It has rallied some 20% from that quick bottom and has since been repeatedly testing these levels.  At these levels, the stock is already back to the range out of which it started 2007 and proceeded to log in a 250% climb. 

Research in Motion shares closed Friday at $41.92, and have traded as high as $148.13 in the past 52 weeks.

So with all the aforementioned competitive advantages, the stock correction that seems to have run its course and a valuation that results in the lowest PEG (Price/Earnings to Earnings Growth Rate) ratio among its comparable peers (Apple, Nokia and Microsoft), RIMM is a compelling buy.

Recommendation: Buy RIMM shares immediately. But don’t purchase your entire intended position all at once. Leave some firepower to buy a second block of shares during a strong pullback in the stock or in the general market – should one occur – or after the company reports results from the current quarter. (**)

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Money Moves Alert" specialized trading service. "Buy, Sell or Hold" is a Money Morning feature that has most recently analyzed such companies as Wal-Mart Stores Inc. (NYSE: WMT), Hewlett-Packard Co. (NYSE: HPQ), Apple Inc. (Nasdaq: AAPL), Google Inc. (Nasdaq: GOOG), or the Brazilian ETF, theiShares MSCI Brazil Index (NYSE: EWZ), which rose 42% in the six days after Marquez rated it as a "Buy."]

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Research in Motion.

News and Related Story Links:

• Money Morning Buy, Sell or Hold Feature:
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• IDC.com:
  Mobile Phone Market Poised for Slowdown in 2009, Says IDC.