After breaking out Monday,IBM (
) remains in a buy zone.
The stock cleared a 208.09 buy point in volume 61% above
average. The ceiling of the 5% buy zone is 218.49.
By simple logic, this shouldn't be happening. Revenue growth
was flat in Q1 and dropped 3% in Q2. Europe is the problem. IBM's
revenue fell about 15% in France, 12% in Italy, 8.5% in Spain and
11% in Germany in the second quarter.
Currency translation was responsible for big chunks of the
revenue declines, and Europe's problems don't appear to be
So, why does the market like IBM?
On Monday, Deutsche Bank affirmed its buy rating on IBM and
raised its price target from 225 to 240. The bank sees
accelerating hardware growth short term. And favorable product
cycles in services and software are expected to drive growth over
The opinions of analysts, however, aren't nearly as important
as the buying and selling by funds. While funds lightened their
IBM holdings in Q2 by about 1%, some highly respected funds were
aggressively adding to their positions.
Fidelity Contrafund increased its IBM stake 11% in Q2 after a
22% boost in Q1. Magellan Fund opened a new position in Q1 and
upped its holdings 63% in Q2.
While IBM's revenue has taken a hit because of currency,
earnings are holding up well. Annual EPS grew 13% in 2009, then
17% and 15%. The Street expects 13% growth this year.
IBM has a history of beating EPS estimates. Big Blue has
topped the Street's consensus estimate every quarter for the past
The company will report after the close Oct. 16. Analysts
expect earnings to grow 10% on another 3% drop in revenue.
Margin expansion has helped IBM deliver earnings gains. Pretax
margin has almost doubled since 2003 -- rising from 10.6% in 2003
to 20.2% last year.
Also, revenue growth is strong in certain areas of the world.
The BRIC countries -- Brazil, Russia, India and China -- combined
for 12% growth in Q2.
IBM's dividend yield is 1.6%. The quarterly payout has more
than doubled since early 2008.