IBM (IBM): Corporate America's Last Man Standing

The number of large American companies which have effectively dodged the falling safe of the recession can be counted on most people’s fingers and toes.

Wal-Mart (WMT) has done remarkably well, but its latest financial forecast was considered a bit short of expectations. McDonald’s (MCD) still does well, and as people have less money for food, things could get even better for the fast food operation.

Some of the oil firms are prospering. Exxon Mobil (XOM) will be a tremendous cash machine as long as crude is above $10. It may not make the kind of profit it did last year, but its dividend is safe, which is something which many other public corporations envy.

There was a time when IBM (IBM) was big tech’s punching bag. It let the software operating system business slip through its hands and into those of Microsoft (MSFT). It gave up market share in the PC industry and was eaten up by more nimble and lower-cost operators. Then the demand for mainframes began to suffer. Processing power became good enough so that fewer and fewer customers needed computers that took up a city block. Clusters of servers began to seize many of the functions that IBM’s expensive machines had handled for decades.

IBM’s entry into services, outsourcing, and new software products more than made up for the losses from operating software and processing power. IBM’s revenue rose 5% to $103.6 billion in 2008.. Operating income was up 15% to $16.7 billion.

Even though Redmond had taken most of the PC and server operating system business,.IBM was able to develop a software operation that had $22 billion in sales and an 85% gross in the last quarter. The firm’s global technology services division had revenue of $39.3 billion and margins of almost 33%.

Wall St, may say that IBM slightly missed consensus projections of revenue in the fourth quarter. But, the company’s forecast for 2009 was particularly strong. IBM anticipates 2009 earnings of at least $9.20 a share. The analyst consensus number was for $8.75.

IBM operates in the same global recession that all of its competition does. It is meticulous about managing costs in relationship to revenue. Some of its employees would even claim expense control borders on brutal. IBM certainly has no trouble moving jobs to geographic regions where labor is talented and inexpensive.

The magic behind IBM’s success may be no more than intelligent diversification. Each of its four largest divisions could be a standalone company. IBM’s financial arm has operating margins of 51%. IBM may not have a perfect track record, but most of its accomplishments have been extraordinarily successful. As Jack Nicklaus once said, the key to golf is managing your worst shots.

If IBM hits its numbers this year, it will be one of the few multi-nationals that will be able to say that 2009 went well. It will be nearly as impressive as a man who rides a bike through a hurricane.

Douglas A. McIntyre