IBM Growth Sustained Worldwide

With over half of its revenue (58%) coming from outside the United States, International Business Machines Corporation (IBM) has been more insulated from recent weakness in the U.S. economy than many of its peers.

Further, we are encouraged with IBM’s focus on more profitable businesses, such as software and services, and exit of low-margin businesses. IBM has strengthened its position through strategic investments and acquisitions in emerging higher value segments like SOA, Information on Demand, business process services, and open modular systems.

With the strength of its global on-demand model, IBM is experiencing strong revenue growth in all geographies, with robust growth in emerging markets worldwide. Given strong performance in the first half of 2008, we maintain our Buy recommendation on the shares of IBM with our six-month target price of $140.00, which reflects a P/E multiple of 14.8x our 2009 EPS estimate.

Shares of IBM are currently trading at 14.3x our 2008 earnings per share estimate of $8.75, which represents a significant discount to the industry and a slight premium to the S&P 500. Given the size and diversified businesses of IBM, we expect that the shares will always trade at a discount to the industry, which includes a number of less profitable, but rapidly growing companies.

Anita Mohata contributed to the report.

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