IBM (IBM): The Recession's First Recession-Proof Company

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The market was buoyed by Intel’s (NASDAQ:INTC) earnings. It should have been. Gross margins were good, Year-over-year results were fine. If there was any concern about the quarterly report is was the drop of key P&L numbers from Q4 07 and guidance which was modest.

Intel’s news did not cause traders to handle live snakes or speak in tongues. Its shares moved up a little under 6% for the day. Looked at in the context of the last several years, Intel still trades well below the highs it made in 2004 and 2005. It is also,at $22.13, well below its 52-week high of $29.77. There is enough concern about the global PC and server markets to have kept Intel traded in a relatively narrow range for the last three months.

IBM (NYSE:IBM) is another matter altogether. It made a case with its earnings and forecasts that it will be completely unaffected by the present recession even if it lasts the year. After hours, IBM traded close to $125. That puts it back near its highs from 2000 and 2001 when it was considered one of the flagship’s of the US economy. It is any wonder? The company, more a hardware than a software shop at the time, had operating margins of 14% in 2000. IBM then went into a decline which lasted for nearly five years.

The art of IBM management was to change the company’s business enough so that it was not vulnerable to any one sector of its operations, any industry with a high concentration of its customers, or any single geographic area.

The results of the rebuilding of the company showed. IBM had first quarter 2008 EPS of $1.65 per share from continuing operations, up 36%. Revenue for the first quarter was $24.5 billion, an increase of 11 % from the same period a year ago. While revenue in the Americas was up a modest 8%, in every other region the numbers improved by double digits.

IBM’s three main divisions, global technology, global business, and software all has sales increases of between 14% and 18%.

Pre-tax operating margins are back above 13%, back in the neighborhood of IBM’s banner year in 2000.

IBM beat analyst estimates and raised its full-year earnings forecast to at least $8.50 per share from a February projection of at least $8.25. But, that is beside the point.

Almost all of America’s larges tech companies rely on one or two major businesses to drive the numbers. Microsoft (NASDAQ:MSFT) has its Windows and Office franchises. Cisco (NASDAQ:CSCO) has its switching and routing operations. Orcacle (NASDAQ:ORCL) has its database and applications software enterprises.

IBM has five major businesses, and all, except its systems operation, are doing well. Even as a laggard the systems division’s gross margins are 37% and growing.

For all practical purposes, IBM is trading at an eight-year high, in the teeth of a recession. That is unprecedented. It might be so even in a good economy, but it is Houdini-like now, a trick which none of IBM’s peers have mastered.

Douglas A. McIntyre