Big Blue boss says company is positioned to gain market share
In this year’s letter to shareholders, IBM (NYSE: IBM) CEO Sam Palmisano says, “We will not simply ride out the storm. … Rather we will take a long-term view, and go on offense.”
IBM has been firing on all cylinders lately. Earnings per share soared by 24 percent year over year in 2008, while sales rose 5 percent to $103.6 billion. Big Blue has nearly $13 billion in cash equivalents.
That sets IBM up to jump on the hottest opportunities out there. To Palmisano, that means investing in a new world order, using global interconnectedness to run everything “smarter,” and tackling problems such as inefficient energy usage, traffic congestion, and unnecessarily expensive food production. All can be improved with technology. And IBM wants to be the one that makes it all happen.
IBM’s early efforts in “smart” infrastructure technology around the world have already decongested Stockholm, improved water management in Brazil and started work on an automated power grid in Malta. IBM has also partnered up with Google for smarter electronic storage of health records.
With such a large war chest and a well-defined plan of attack, IBM seems poised to make this “smart world” vision a reality, but that’s not to say there won’t be competition. Still, with a recent P/E ratio around 10 and a dividend yield above 2 percent, IBM is an attractive blue-chip.
Ask the Fool
Q: What’s “the Dow”? – P.D., Akron, Ohio
A: It’s the Dow Jones industrial average, created in 1896 by Charles Dow, who also established the Wall Street Journal. Though many people think of the Dow as a representation of the entire stock market, it’s really just an index of 30 major American companies. These blue chips include 3M, Boeing, General Electric, DuPont, McDonald’s, Procter & Gamble, IBM, Caterpillar, Coca-Cola, Merck, American Express, Walt Disney, Wal-Mart and ExxonMobil. The roster doesn’t change often, but there has been a lot of activity in recent years. In 1999, Sears, Union Carbide, Goodyear Tire and Chevron were replaced by Home Depot, Microsoft, Intel and SBC Communications (later to become AT&T). In 2004, International Paper, AT&T and Eastman Kodak were replaced by Pfizer, Verizon and AIG. In 2008, Altria, Honeywell and AIG gave way to Chevron, Bank of America and Kraft Foods.
Q: What is a company’s “business model”? – B.H., Opelika, Ala.
A: No, it’s not Alan Greenspan in a bikini. A business model is how a company makes its money. Think of eBay and Amazon.com. EBay connects individual buyers and sellers online and profits by taking a percentage of each sale – all without carrying any inventory. Amazon.com’s main model is more capital-intensive, requiring warehouses to store many products so that they can be quickly shipped out to customers. Even more capital-intensive is Barnes & Noble, with its hundreds of brick-and-mortar stores. (EBay is a Motley Fool Inside Value selection. EBay and Amazon.com are Motley Fool Stock Advisor recommendations.)
When evaluating a company, assess its business model. Will it permit the firm to grow quickly and to fend off competition? Is it expensive to maintain?
My dumbest investment
Back in the 1980s, I tied up more than $40,000 in a handful of limited real estate partnerships. Over time, my modest gains were eroded by delays, legal problems, unrented spaces, real estate broker fees and steep executive salaries. It took more than 10 years to get out of the investments. I was lucky to break even, but I lost many years’ worth of gains that I might have made elsewhere with the money. I was frustrated that there was no secondary market in which I could sell them. – D.S., via e-mail
The Fool responds: One major drawback of limited real estate partnerships is that you can end up feeling trapped, as you can’t get in and out of them as easily as you can stocks and mutual funds. Investors interested in real estate might want to learn more about stocklike real estate investment trusts (REITs) at www.reit.com and elsewhere. Or investigate real-estate-focused funds such as Cohen & Steers Realty (ticker: CSRSX), Third Avenue Real Estate Value (TAREX), CGM Realty (CGMRX) or Russell Real Estate Securities (RRESX). Look them up at Morningstar.com.