Tickers in this Article: IBM, INFY, CSC, DELL, EMC, CRM, RHT
Old-tech hasn't been getting much love lately, but this earnings cycle may help bring investors back to many of these old-school tech names. For although weak signings in the service business may send some investors to the sidelines, IBM (NYSE:IBM) reported an otherwise solid quarter and Big Blue remains a respectable less-risk play on technology.

TUTORIAL: Economic Indicators To Know

A Mostly Solid First Quarter
IBM reported top-line growth of 8%, adjusted down to 5% on a constant currency basis. Growth was led by the Systems and Technology business (hardware, mostly), which posted 19% growth with strong mainframe and UNIX business. Software grew 6% this time around, while the services business rose by a like amount.

IBM also delivered solid operating leverage for the first quarter, though readers should realize that there are a lot of adjustments and moving parts here and the numbers will vary from investor to investor depending upon what charges they choose to add back. Nevertheless, gross margin ticked up almost a full point, while operating margin expanded nicely as adjusted operating profits grew more than 20%.

Services - The Fly in the Ointment
One troubling detail for the quarter was the low level of bookings in the service business. Services are a huge business for IBM (nearly 60% of total revenue), but bookings in the first quarter were down 18%, to about $10.5 billion. That's a worrisome book-to-bill for IBM, even granting that the company had previously pulled some business forward.

Normally it might seem easy to just wave that off as an anomaly, but Infosys (Nasdaq:INFY) also delivered some disappointing news not so long ago. On the flip side, Accenture (NYSE:ACN) posted pretty solid results, so it's not clear whether there are some meaningful market share shifts going on right now. Investors interested in this sector should probably keep an eye on Cognizant (Nasdaq:CTSH) and Computer Sciences Corporation (NYSE:CSC) to see whether it is IBM and Infosys or Accenture that is the anomaly right now.

Good News For Hardware
The results out of IBM's hardware business should be relatively encouraging for investors in names like EMC (NYSE:EMC), Dell (Nasdaq:DELL), and Hewlett-Packard (NYSE:HPQ) as it is pretty clear that businesses are spending on gear once again. Of course that is not to say that all will benefit equally; Dell and HP have dinged IBM for a while on server margins and EMC does not seem terribly preoccupied with the likes of IBM.

Software - More Deals to Come
IBM built a large part of its software segment through deals, and the company seems willing to keep at it. A play for a big fish like Salesforce.com (NYSE:CRM) seems improbable, but a company like Red Hat (NYSE:RHT), Taleo (Nasdaq:TLEO), or SuccessFactors (Nasdaq:SFSF) could make some sense. At the same time, the company continues to see good demand in legacy businesses like mainframe, where competitors like CA Technologies (NYSE:CA) and BMC (NYSE:BMC) likewise stand to benefit from increased demand for mainframe hardware (as that demand should flow through to software).

The Bottom Line
IBM has had a good run of late, but seems to have stalled out near this multi-year high. With plenty of commentators rushing to publish their version of "sell in May and go away", there may be something of a stacked deck against a big tech name like IBM right now. Still, the stock is a bit undervalued and a fine holding for investors who want tech exposure with less of the volatility that comes with more aggressive growth names. (For additional reading, also take a look at Investing In Tech Through Emerging Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center