Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter, recommends buying IBM. "Benefiting from a weak U.S. dollar, technology heavyweight IBM posted a strong first-quarter report card, earning $1.65 a share, up 36% from the year-ago period as revenue increased 11%," he says.
International sales--especially in emerging markets--have driven the profits of most of the largest multinational companies higher, even as U.S. growth has slowed. Subramanian offers IBM's (nyse: IBM - news - people ) substantial international exposure as another reason for wanting to own the stock now.
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"IBM derives two-thirds of its revenues from outside the U.S., with BRIC nations [Brazil, Russia, India and China] providing one-fourth of the company's revenues," he says. "IBM is well positioned to benefit from global growth and is optimistic on its future, recently raising its 2008 earnings forecast to $8.50 a share and hiking the quarterly dividend by 25%."
At $123.62 a share, IBM trades for 13.7 times forecast current-year earnings of $8.54 per share, and 12.9 times expected earnings per share for 2009. The shares yield 1.6%."
Investors are not paying IBM the earnings multiple it deserves, contends Subramanian. Based on the company's forecasts, he has a point.
"Looking farther out, the company expects earnings to grow at a 14% to 16% clip, enabling EPS to range between $10 and $11 in 2010," he says.
Applying a conservative and slightly below-market price-to-earnings ratio of 15 to those earnings produces a stock price of $150 to $165 in the next two years. Subramanian says that a share price of $145 is "certainly doable" in the next several months.
"IBM now sits above its 50- and 200-day moving averages," says Subramanian, who likes buying the stock after the pullback of the past few days.
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