Something scares me about IBM and I'm still keeping my reservations on them. They've been trading well below the $100 mark for the past few years and I still have my target price at the $100 mark. Meanwhile a few weeks back, IBM announced that it had repurchased $12.5 billion of its outstanding common stock through accelerated repurchase agreements, or 118.8 million shares for $105.18 per share - a good sign to say the least. They'll be funding the repurchase with $1 billion in cash, and an
$11.5 billion term loan, which IBM intends to refinance with longer-term debt over the coming year.
Lenovo on the other hand seems to be something I'm more curious in putting my money in. Lenovo’s 2007 net profits that ended March 2007 came to US$161 million, and amount that was well above most analysts expectations - though a part of it as a US$12 million reversal in prior restructuring charges. Margins also impressed across all geographical segments, with EBIT margins at 5.9% from its China business, which was at 4.8% a year ago. Overseas operations also showed encouraging results with EBIT also increasing to 1.6% from -0.3% in the Americas, and 2.5% from 1.6% in Europe, Middle East and African operations.
With these impressive results, Lenovo is making a come back, and I'm expecting Lenovo to post solid revenue growths this year - explained by higher PC shipments triggered by the launch of Microsoft’s Vista operating system. Couple this together with lower component costs, and they should also improve on margins even further. For 2008, a reasonable forecast would be revenues in between US$15,550 to US$15,600 million and earnings of US$250 to US$260 million.
Lenovo trades on the Hong Kong Stock Exchange and on OTC here.
- Ishmiel Kapur Jun. 19, 2007
Disclosure: I do not own any positions in Lenovo or IBM.