We maintain our Buy rating on International Business Machines (IBM) ahead of its second-quarter earnings, which the IT giant is expected to release on July 16, 2009.

Given the size and diversified businesses of IBM, we believe that it is a defensive play in the current environment as the company derives a significant portion of its revenue from international sales. Due to its large non-US revenue base, IBM has been better insulated from the recent weakness in the U.S. economy than many of its peers.

IBM performed well in the first quarter of 2009 despite the difficult economic environment because of its long-term strategic focus, including shifting to software and services, divesting commodity businesses, creating solutions that help clients reduce cost, conserving capital and cost cutting.

IBM’s first-quarter results indicated its strong position in emerging markets. In addition, new contract wins will result in increased revenue flow for the company in the coming quarters, which should continue to drive growth.

As a result of workforce rebalancing actions undertaken last year, the company expects to continue expanding margins and registering double-digit profit growth in the second quarter of 2009. We estimate earnings of $2.17 per share on $22.0 billion of revenue when it delivers second-quarter results.

During the comparable year-ago period, IBM earned $1.97 in EPS on $26.8 billion in revenue. With margin expansion, we believe the company will be able to meet or beat on the current quarter.

With a powerful balance sheet, IBM expects full-year EPS of at least $9.20, which is a growth rate of 3.0% over 2008 levels. The company expects to deliver EPS of $10 to $11 in 2010, which is most likely to be met. Although revenue is not expected to grow much, we expect margin improvements in 2009 through cost cutting initiatives.

The company’s long-term prospects look brighter as it maintains a strong position in the software and services market and is holding up well against recession. Right now, the biggest challenge facing IBM is to meet its guidance.

We expect IBM to perform better than some of its top competitors such as – Hewlett-Packard Co. (HPQ), Cisco Systems Inc. (CSCO), and Dell Inc. (DELL) – and post strong results in the second half of the year and into 2010. IBM has outperformed the tech sector year to date, despite the weak economy.

IBM appears to be an attractive entry point from the valuation aspect. We set our six-month price target at $120.

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