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Tables & Charts

Five-year Forecast...

If "a picture is worth a thousand words," then the table that follows below pretty much says it all about Big Blue.  The table looks five years back, and five years forward to assess at a high level the performances of the company's three major lines of businesses - hardware, software and services

Actual/Forecast Hardware Software Services Revenues Earnings
C.A.C. 05-10: -3.6% 7.4% 3.5% 1.8% 13.3%
C.A.C. 10-25: 4.0% 4.9% 3.6% 4.1% 4.9%

As you can see, after shrinking in the last five years, partly due to disposition of the PC business and some other one-time sales, we expect hardware to resume growth in the next five years at a rate of 4% per year.  Software and services should grow a little faster - at about 5% and 4% respectively.  And since these two units now represent more than 80% of IBM's business, the whole company will also grow over 4% compounded annually.

But the company's net earnings will grow even faster.  And maybe even faster that 5% compounded annually if IBM decides to spend more money on acquisitions and less on stock buybacks.

The pattern we are seeing here is that of a company that's not seeking growth for the sake of growth.  It is that of a company whose goal is quality earnings growth.  It is the growth that only happens when earnings and margins rates of increase exceed that of the bulk of the business - revenues.

That's what we were trying to get the former IBM chairman, Lou Gerstner, to understand back in 1996 (see Break Up IBM!, Mar 1996 and Louis XIX of Armonk, Aug 1996).  We were not successful.  But his successor "got it."  Sam Palmisano showed the first spark of it in public during an analyst meeting in Bangalore, India, in June 2006 (see IBM vs. HP: A Tale of Two Blues).  Here's the chart that "said it all" back then about the new Big Blue.

Ever since, we have been seeing confirmations of this strategy, and the financial benefits that accrued to IBM shareholders from it.  Just as important, especially from Wall Street's point of view, the new strategy has brought stability back to IBM results.  "Steady, as she goes" was not chosen randomly as the theme of this analysis and forecast.

One had to marvel at how well the Big Blue ship sailed through the financial hurricane of 2008 practically unscathed.  Big Blue excelled as other, bigger companies keeled over, some having to be bailed out by various governments just to stay afloat.  The outcome showed that bigness was no longer king in the IT industry, nor in business in general. 

Here's how we finished out last year's forecast:

"Nimbleness, flexibility, creativity, ability to change quickly... are prerequisites for survival in storms at high sea.  And those are the qualities that Big Blue exhibited in the last four years since IBM first hoisted its Quality over Quantity flag.  Maybe one of these days, months or years, the penny will drop and Wall Street will also notice it.  Once they do, the Big Blue will morph into a Smart Blue, the king of the Smart Planet, and its shares will zoom past $150 from the current $128-trading range."

Well, Wall Street did take notice.  And IBM is now trading in the mid $160s.  But it still has room to go up.  We figure about $180 would be a fair price right now relative to its major competitors.

And now, here are some detailed numbers that back up this forecast...

IBM 2011-2012 P&L Forecast  (PDF file)

IBM 2010 Business Segment Tables (PDF file)



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