Excerpts from Confidential Client Edition

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IBM CORPORATE

Annual Update to Annex Research’ Five-year Forecast for IBM

Quality over Quantity

Our “Save, Spend & Split”-Strategy Now Being Partially Implemented

PHOENIX, Mar 2 – Our harping over the last two years seems to be finally paying off – for IBM shareholders.  Looks like Big Blue is partially implementing our recommended “Save, Spend & Split”- growth strategy.  We first annunciated it two years ago, and reiterated it last April (see “Save, Spend and Split,” May 2003, and “Ditto, Ditto! Is Anybody Listening?”, Apr 2004).

IBM is spending some money on some (small) acquisitions in the services arena[1], and it has split off a major chuck of its unprofitable hardware portfolio (see “Good Riddance, Finally?,” Dec 2004).  What is hasn’t implemented as yet is the “save” part – eliminating or curtailing the financial drain resulting from stock buybacks.  In fact, the company spent a record $7.3 billion on share repurchases in 2004, up 63% over 2003, even though its stock has actually declined since a year ago!? (see the charts).  

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Long Lasting Benefits

The benefits of such a change in strategy will be long lasting.  In 2006, for example, we expect the IBM revenues to rise modestly (up ...% to $... billion).  But the net margins are expected to surge to ...%, with net earnings just a shade under $... billion, another all-time record.

If this forecast comes to pass, 2006 will be the first year in more than two decades that IBM net margins reach a coveted double-digit range. 

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Linux, Recentralization and SMB Reintegration Trends

As we noted in our recent IBM revenue forecast (see “IBM Servers to Grow Again,” Feb 2005, incorporated into this five-year forecast by reference), the company will also benefit from the new Linux, recentralization and reintegration trends.  

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The upshot of all this has been and will be renewed organic growth of the IBM hardware segment.

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Five-year Outlook

The expected hardware and software growth spurts are likely to put the IBM revenues on track to reach the elusive $100 billion-mark by 200X.  In 200X, they are likely to be $104 billion.  That’s about the same five-year forward growth rate as that in the last five years (1999-2004), a little less than 2% compounded annually between 200X and 200X. 

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While these revenue growth rates may seem pretty anemic, much more important to the IBM shareholders, however, is the expected net earnings growth.  

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By the way, any of these growth rates could change significantly up or down with any major acquisition or asset sale, in accordance with our “Save, Spend and Split”-strategy recommendation.

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"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (6 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting

Bob Djurdjevic

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