Excerpts from analysis of IBM and HP's business results and outlook (June 6, 2006)

Annex Bulletin 2006-25 June 6, 2006

Excerpts from CONFIDENTIAL client edition

INDUSTRY TRENDS

Updated 6/06/06, 1:00PM PDT, adds Summary

IBM and HP Business Results and Forecast

A Tale of Two Blues

Both Companies Are Doing Well in Business, But Only HP Is Favored by Wall Street; Big Blue Trying to Change That Now With Its New "India Opus"

SCOTTSDALE, June 6 - Both companies are household names. Both have been around long enough to have the competitors and the media wondering "how did they do it for all these decades without burning and crashing?" Both are doing well in business. Both are about the same size. Both are big on India. Both have blue logos. But only one is singing the blues when it comes to its stock price - the Big Blue.

Wall Street is still punishing IBM for its first quarter 2005 surprise, while applauding the moves that HP's new CEO has made to turn his company around (see above charts). Which is why IBM is now trying a different tune. Enter its new "India Opus"...

[snip]

Will IBM's Bangalore conference reverse that and return the IBM stock on the growth path? Well, IBM certainly hopes so. And the early indications are positive. IBM stock is up 0.7% to $79.60 in this morning's (June 6) early trading even though the Dow is down by 65 points even after yesterday's big 200-point sell-off.

But "one swallow does not make a spring." Only a sustained marketing effort to both Wall Street's research and trading influencers will change Big Blue's fortunes in the future.

[snip]

IBM Business Segments

To see how strong Big Blue's fundamentals have been, and how much this company has improved in the four years of Sam Palmisano leadership, let's walk through its various lines of business. First an industry view of Big Blue...

[snip]

Global Services. That IBM is the industry leader in global services, and that this business segment accounts by far for the biggest revenue share, ought to come as no surprise to the attendees at IBM's Bangalore investor conference. But they also saw how IBM Global Services (IGS) growth slowed and then dwindled as IGS got bigger and bigger.

[snip]

Hardware. If IBM Global Services was Big Blue's biggest success story of the 1990s, and it was, then the revival of the company's hardware businesses has to be the greatest IBM turnaround feat of the first decade of the 21st century.

[snip]

Software. Which brings us to IBM Software, the company's most profitable unit. In 2005, software revenues grew by 4.4% to $15.8 billion. We figure that in 2006, they would grow by 5.5% to $16.6 billion. From the IBM shareholders' point of view, however, this unit's most redeeming virtue is its high profitability.

[snip]

IBM: Undervalued Stock

In fact, when all four major IBM business units are evaluated using comparable price/earnings ratios to those of their major competitors, the company's current price may be at least 20% below its fair market value.

[snip]

Summary

So there is indeed a lot of value hidden under the covers of the Big Blue logo. After all the shouting and singing in IBM's "India Opus" is over, the company is clearly hoping that Wall Street's attention and focus on IBM's growth markets and strategies will eventually pay off in stock upgrades. That may be a hard goal to achieve right now, amid the year's biggest overall market sell-off, but patient investors may be richly rewarded when all the shouting about the higher interest rates dies down on Wall Street. After all, that's hardly new news.

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

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Volume XXII, Annex Newsflash 2006-25
June 6, 2006

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