Information Technology (IT) giant, International Business Machines Corp. (IBM) was selected by a leading global dairy producer Danone, to build its secure trading network.
IBM will replace Danone’s existing network with its Sterling Collaboration Network, a part of IBM’s Smarter Commerce portfolio. This is expected to improve Danone’s business relationships with its suppliers, business partners and customers.
IBM’s network is well known for its speed, reliability, accuracy, visibility and availability at lower cost. Danone’s shift to IBM’s network will lend the desired flexibility in customer dealings, which mainly includes large retailers.
IBM’s network is also expected to enhance Danone’s operations management with a focus on reducing cost. The network system will automate Danone’s order-supply chain and will likely bolster its customer base going forward.
IBM will manage Danone’s regular operations including ordering, invoicing, delivery and logistics. The company will also offer conventional electronic data interchange (EDI) service across a diverse range of formats, allowing integration of third party data with Danone’s warehouse data.
The large scale migration to the new network will involve more than 600 trading partners. IBM is also expected to manage more than nine million messages per year.
IBM remains focused on developing its Smarter Commerce portfolio, which is a significant part of the company’s Smarter Planet initiative. Smarter Planet, expected to be the most significant driver of IBM’s results through 2015, is expected to generate revenue of $10.0 billion by 2015 from the $3.0 billion level in 2010.
Apart from Smarter Planet, IBM has identified cloud computing, business analytics and emerging markets as the key growth drivers through 2015. These are expected to contribute approximately $20.0 billion in revenue growth by 2015.
IBM expects to earn revenues of $50.0 billion by 2015, aided by base revenue growth of 2.0%, 1.0% from a shift to faster growing business mix and 2.0% from acquisitions.
Sales from emerging markets are expected to generate 50.0% of total revenue by 2015, up from 21% posted in 2010. IBM expects business analytics to achieve revenue of $16.0 billion by 2015.
IBM expects to achieve earnings of approximately $20.00 per share by 2015. The company expects to generate $100.0 billion of free cash flow over the next 5 years, of which $70 billion will be returned to IBM shareholders in the form of share buyback and dividends.
We believe that IBM’s growing initiatives in the Smarter planet, business analytics and optimization and cloud computing areas will drive long-term growth.
Recommendation
We remain optimistic on the company’s long-term growth following the bullish outlook provided by management. A solid service backlog, a diversified product pipeline, and higher growth from outsourcing and business analytics will cumulatively boost top-line growth going forward.
Moreover, the ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.
However, all these positives notwithstanding, we have a Neutral recommendation on IBM due to currency fluctuations, decreasing contract signings and increasing competition from Amazon Inc. (AMZN), Accenture Plc. (ACN), Hewlett-Packard Company (HPQ) and Microsoft Corporation (MSFT).
Currently, IBM has a Zacks #3 Rank, which translates into a Hold rating in the short term.
ACCENTURE PLC (ACN): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis Report
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
Zacks Investment Research
