IBM In A Good Position For Another Successful 100 Years

International Business Machines Corporation (IBM - Analyst Report) just turned 100 years old on June 16, but it looks like its best years still lie ahead.

Earnings estimates have been steadily climbing over the last several months as Big Blue continues to grow revenue and expand its margins. It is a Zacks #2 Rank (Buy) stock.

IBM has also been generating tons of free cash flow which is has been using to buy back shares and raise its dividend. It currently yields a solid 1.8%.

First Quarter Results

IBM delivered better than expected results for the first quarter of 2011. Revenue rose 8% to $24.6 billion in the quarter, ahead of the Zacks Consensus Estimate of $24.0 billion.

IBM actually has many diverse revenue streams. Revenue for the first quarter was divided as follows:

Global Technology Services: 40%

Global Business Services: 19%

Software: 22%

Systems and Technology: 16%

Global Financing: 2%

Other: 1%

Adjusted Software revenue increased 10% in the quarter while Systems and Technology revenue rose 19%. Services revenue was up 6%. Meanwhile, cloud revenue was 5 times what it was in the first quarter of 2010.

IBM has been capitalizing on emerging market growth. Revenues in the BRIC countries (Brazil, Russia, India and China) rose 26% year-over-year in the first quarter, for instance.

The company's total gross profit margin improved from 43.7% of revenue to 44.5%. Operating income rose 9% as the pre-tax margin inched up from 15.4% to 15.5%.

Earnings per share came in at $2.31, beating the Zacks Consensus Estimate by 2 cents. It was a 17% increase over the same quarter in 2010.

Guidance Raised

Management raised its guidance for 2011 following solid first quarter results. The company now expects to earn "at least" $13.15 per share, up from previous guidance of "at least" $13.00.

Analysts raised their earnings estimates too, sending the stock to a Zacks #2 Rank (Buy). Consensus estimates have been steadily rising for both 2011 and 2012 over the last several months, as seen in the company's Price & Consensus chart:

Based on consensus estimates, analysts are projecting 15% EPS growth in 2011 and 10% growth in 2012.

Returning Value to Shareholders

IBM generates exceptionally strong free cash flow quarter after quarter and has been using that cash to return value to shareholders through stock buybacks and dividend increases.

The company spent over $4 billion in the first quarter of 2011 buying back shares and $795 million paying out dividends.

Earlier this year, IBM raised its quarterly dividend by 15% to 75 cents per share. Over the last 10 years, Big Blue has raised its dividend at a compound annual rate of 18.3%. It currently yields 1.8%.

Even with all of the share buybacks and dividend hikes, IBM has a strong cash position. At the end of the first quarter, the company had over $13 billion in cash and marketable securities on its balance sheet.

Valuation

The valuation picture looks attractive for IBM. Shares trade at just 12.7x forward earnings, a significant discount to the industry average of 19.9x.

Its PEG ratio is a reasonable 1.2 based on a 5-year growth rate of 10.7%.

The Bottom Line

Despite just turning 100, it looks like IBM still has its best years ahead of it. The company continues to deliver impressive financial results and analysts' estimates have been rising steadily over the last several months. It is a Zacks #2 Rank (Buy).

IBM is also a cash flow machine and has been returning value to shareholders through massive stock buybacks and aggressive dividend hikes. With shares trading at just 13x forward earnings, there isn't much not to like about Big Blue.