IBM's rosy future rates a `buy'

Taking Stock

Your Money

October 31, 2004|By ANDREW LECKEY

I've built a large stock position in International Business Machines Corp. over the years. What is the outlook for this company?

- F.H., via the Internet

Big Blue isn't blue at all these days.

The world's biggest vendor of computer equipment and provider of information technology services sees signs that corporate spending on tech gear is picking up in the Americas and Asia Pacific.

As a result, it intends to hire 18,800 employees worldwide this year and end 2004 with 330,000 employees, its biggest work force since 1991. One-third of the jobs will be in North America, and two-thirds will be in its global business emphasizing growth opportunities such as the Linux operating system.

The firm beat analyst estimates in its third quarter with a profit of $1.80 billion despite a pension settlement charge. That compares with $1.78 billion in the quarter last year. Management has boosted its earnings-per-share expectations by 3 cents for the full year, to $5.

Shares of International Business Machines (IBM) are down 8 percent this year, after last year's 20 percent increase.

Major new products

IBM is introducing significant new products, such as its Blue Gene/L supercomputer to be completed in 2005. It is to be the world's fastest, thereby taking that distinction away from a Japanese supercomputer.

It released its first eServer BladeCenter platform for the telecom market. There's also a new version of its database software aimed at users of Linux and Unix operating systems designed to take market share from Oracle Corp.

While IBM boasts a stellar brand name and extensive product offerings, its vast business must deal with currency shifts and other potential problems that are sometimes difficult to predict. Regarding additional pension lawsuits, it will have to deal with additional costs as the result of either settlements or a federal court decision.

The consensus rating on the stock of IBM is currently a "buy," according to the First Call research firm in Boston. That consists of four "strong buys," 11 "buys" and eight "holds."

15% profit rise

Earnings are expected to rise 15 percent this year, versus 14 percent forecast for the computer hardware industry. Next year's expected increase of 11 percent compares with 17 percent projected for its peers. The firm's estimated annualized growth rate for the next five years is 10 percent versus 11 percent expected industrywide.

Alliances are a big part of the firm's strategy. It recently entered into a 10-year partnership with Boeing Co. of Chicago to develop Defense Department technology projects. It also forged a $1 billion five-year technology and marketing alliance with PeopleSoft Inc. to do battle with Germany's SAP AG in corporate financial software.

I own Putnam Fund for Growth & Income in my retirement portfolio. What is your opinion of this fund?

- A.H., via the Internet

It's not easy to uncover big future winners when a fund's portfolio is filled with the largest, most closely watched corporate names in the world.

The fact that small-capitalization stocks have done better than blue chips since 2000 has made matters worse.

The $17.6 billion Putnam Fund for Growth & Income (PGRWX) rose 9.4 percent over the past 12 months and had a three-year annualized return of 2.3 percent, according to Morningstar Inc. in Chicago. Both results fall in the lower one-third of large value funds.

"This fund's performance has been below average compared to other funds holding large-cap stocks, so I'm not very confident about its stock-picking," said Morningstar analyst Karen Papalois. "While there is no looming danger and I see no reason to sell, it is a mediocre choice compared to better and more proven funds in its category."

Top stocks held

Its top stock holdings recently were Exxon Mobil, Citigroup, Pfizer, General Electric, Bank of America, American International Group, Fannie Mae, Hewlett-Packard, Altria Group and Tyco International. Twenty-nine percent of assets are in financial services and 20 percent in industrial materials. Other significant groups include health care and consumer goods.

Putnam Fund for Growth & Income does have low portfolio turnover because it buys stocks for two to three years, and its annual expense ratio is a low 0.90 percent. It requires a 5.25 percent "load" (sales charge) and has a minimum initial investment of $500.

Hugh Mullin has led the fund's experienced management team since 1996, helped by Chris Miller and David King.

After the Putnam fund family was accused of fraud by state and federal regulators for permitting some investors and some of its own portfolio managers to quickly trade in and out of its funds, it dismissed chief executive Larry Lasser. New CEO Charles Haldeman has improved compliance, reduced fees and fired some employees and is working to improve performance.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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