By Steve Hamm After a long stretch of doldrums, IBM's (IBM) share price looks like it finally could be moving again. The stock rose nearly 2% Dec. 1 to close near $96 a share. As of Dec. 2 it was flirting with the $100 price it last commanded in February. IBM's price bottomed out at $82 in early August but has risen 15% since then.
And on Friday, Dec. 3, IBM shocked the market when The New York Times reported that Big Blue had put its personal computer business up for sale. If sold, IBM's $12 billion PC unit is expected to fetch somewhere between $1 billion to $2 billion. IBM has struggled to make money selling PCs. In the first nine months of this year, the PC group reported a $70 million pretax profit on $9.4 billion in sales.
"THE OPPOSITE OF HP." A source close to the deal confirms that IBM is discussing the sale of the business with Lenovo, China's largest PC maker, and with at least one other bidder. Other potential acquirers may include a private-equity firm or another Asian computer maker. The sale would bolster Chief Executive Samuel J. Palmisano's strategy of exiting commodity hardware technologies to bulk up more in higher-margin software and services businesses.
"They're doing just the opposite of what Hewlett-Packard (HPQ) did, and that's smart," says Ben Howe, CEO of Boston-based boutique investment bank America's Growth Capital. IBM declined to comment. In morning trading on Dec. 3, IBM shares rose 1.89% on the news, to $97.57.
While Big Blue's recent stock rise is partly the result of a tech rally, you can also credit a string of generally positive quarterly earnings reports, plus promising news on the chip and outsourcing-services fronts. "Their prospects look pretty good," says Arbus Research analyst Wendy Abramowitz.
Analysts are generally bullish on IBM's prospects. Of 25 that follow the outfit, 17 have issued buy recommendations, with seven holds and just one sell. Several analysts have price targets of $110.
TAKING CARE OF BUSINESS. No wonder. IBM has been hitting its numbers quarter after quarter. For the third quarter, it announced revenues of $23.4 billion, up 9% from a year earlier. Excluding a one-time write-off for pension-litigation expenses, its profits rose 12%, to $2 billion. "We're confident in our ability to generate double-digit earnings growth," says Chief Financial Officer Mark Loughridge.
As a result, analysts notched up their profit projections for 2005. Analyst Andrew Neff of Bear Stearns & Co. now forecasts earnings per share next year of $5.50 to $5.55.
IBM's big target right now is an emerging market it calls Business Performance Transformation Services. That means taking over certain business functions for clients -- such as accounting and human resources -- and boosting performance dramatically. CEO Palmisano believes the market for IBM could total $500 billion over the next several years.
STAKING CLAIMS. Big Blue also expanded its footprintn outsourcing on Nov. 23 when it announced the purchase of Liberty Insurance Services, a division of RBC Insurance Services. Under the deal, 700 Liberty employees will transfer to IBM.
The move marks the outfit's first foray into life-insurance claims processing, a market it estimates is now worth about $2.5 billion annually worldwide. Previously, IBM had concentrated on providing services in accounting, customer service, supply-chain management, and human resources.
While IBM seems to be well positioned for growth in services, its bookings are down 20% year-to-year, and the backlog is 3% lower for the first three quarters. This is the first-ever year-to-year backlog decline for IBM Global Services. Analysts will be watching how the division fares over the next several quarters to see if this is a long-term problem.
HIGH SCORE. On a brighter note, prospects for IBM's chip business perked up Nov. 29 when Sony (SNE) announced new details of its plans for the so-called Cell chip, which its jointly developing with IBM and Toshiba. The Cell, which will be the brains in Sony's PlayStation3, due out in 2006, will be based in part on IBM's Power Processor technology.
That gives IBM three for three in the video-game market, since it already supplies chips for Nintendo's GameCube and can now chalk up the next-generation consoles from Microsoft (MSFT) and Sony. The Cell will also power a variety of other machines, including high-definition TVs and home entertainment centers. That could mean IBM selling tens of millions of Power Processors in consumer devices over the next couple of years.
While Big Blue's prospects are solid, the next six months should show whether it's going to be a steady-as-it-goes performer or something more. If the chip and services businesses start to hum, this giant could generate double-digit revenue growth -- at least during peak quarters. Not bad for a boring $90 billion-a-year behemoth. Hamm is a senior writer for BusinessWeek in New York