STOCK WATCH


5 Stable Tech Stocks You Should Love

Elizabeth Ody

These big, reliable technology companies will be top beneficiaries as businesses worldwide retool to cope with the tough economy.



Corporations are starting to emerge from their bunkers. Now that the economy has stabilized, those companies still standing can move on from worrying about their survival to thinking about how they can retool themselves for the slog ahead. Businesses will need to become leaner to thrive-or just to survive-through what most analysts see as a long period of tepid economic growth.

One reliable way for businesses to become more efficient is to upgrade their technology, and the five companies described below should benefit immensely from that trend. You won't find any small up-and-comers on this list-only steady Eddies with good balance sheets.

In the world of tech and beyond it, you won't find many companies more stable than International Business Machines (symbol IBM). Big Blue, once synonymous with personal and large, mainframe computers has remade itself into a software and technology-services powerhouse. Its services segments accounted for 59% of IBM's $45 billion in revenues during the first six months of 2009. Businesses hire IBM to, say, build bulletproof security around their data, overhaul the way they use technology internally or simply run their information-technology departments.

IBM's next-largest segment is software, which accounted for 21% of revenues in the first six months of 2009. IBM's software business is obscenely lucrative, sporting a gross profit margin (sales minus cost of goods sold, divided by sales) of 85%.

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The company's venerable brand is only burnished by its massive research efforts. Big Blue has been awarded more patents than any other U.S. company in each of the past 16 years.

IBM maneuvered through the recession far better than most publicly traded companies. Profits per share in the first six months of 2009 climbed 11% from the year-earlier period, and the company has upped its quarterly dividend twice since the beginning of 2008. Analysts expect profits to grow at an annual clip of 10% over the next three to five years, buoyed by IBM's strong presence abroad (foreign sales accounted for 65% of revenues in 2008). The stock, which closed at $118.83 on August 25, trades for 12 times estimated 2009 profits per share of $9.76, and it yields 1.9%. It is up 43% so far this year.

Shares of Cisco Systems (CSCO) are about as close as you can get to buying stock in the Internet itself. All businesses are doing more of what they do online, and that means they're sending more video streams across the Web. "Video transmission takes up much more broadband capacity" than the simpler data needed to navigate the Web, says Dave Halford, an analyst with the Madison Mosaic funds. He adds that Web users "have to upgrade their entire network system in order to smoothly support that huge increase in capacity," implying robust demand for Cisco's market-leading routers and switches.

Ubiquity is a blessing in the tech world, where corporate IT managers are loath to switch from a trusted brand. Cisco has bred an army of techies proficient with and loyal to its networking gear, through certification programs that have become required coursework for many IT professions. And the company's fortress of cash -- it holds $35 billion of the stuff, or nearly three times the market capitalization of its nearest competitor, Juniper Networks -- suggests that Cisco could buy any company with a competitive technology that might threaten its dominance.

There's no sugarcoating the impact of the recession on Cisco. Sales and profits per share for fiscal 2009, which ended July 25, declined 9% and 20%, to $36 billion and $1.05, respectively, from the previous year. But analysts expect profits to snap back, to $1.31 a share, in fiscal 2010. At $22.00, the stock, up 35% so far this year, trades at 17 times that forecast.

As the business world grows increasingly digital, the amount of data companies must store is swelling. This unrelenting trend virtually guarantees steady growth for EMC Corp. (EMC), a leader in storage.

The market for storage hardware and software is plenty crowded, says Morningstar analyst Michael Holt, but EMC has differentiated itself by being "one of the first companies to push into network storage"--that is, storage on a central server. The company currently claims about 25% of this market. EMC's strategy is to sell customers both the low-margin hardware they need for storage and the high-margin software for smoothly accessing stored data.

Through its 84% stake in VMware, EMC is also "the leader in virtualization technology," says Halford. Virtualization, he explains, is an efficiency-improving technology that allows users to run multiple operating systems on a single machine. "Most surveys of chief technology officers rank virtualization as their top priority because the payback period on an investment is so short," says Jay Sekelsky, manager of the Madison Mosaic Investors fund, which owns shares of EMC.

The recession finally caught up to EMC in the first half of 2009. Sales and earnings per share fell 10% and 26%, to $6.4 billion and 34 cents, respectively, from the same period in 2008. Analysts expect earnings of 82 cents per share in 2009 and $1.03 in 2010, compared with $100 per share last year. At$15.19, the stock trades for 18 times 2009 profits and has popped 45% year-to-date.

Over time, customers have come to view technology hardware the same way they view commodities. That has led to cutthroat competition and shrinking profit margins. But there's something to be said for the resilient giants that have managed to dominate through such adverse conditions: Intel (INTC) and Hewlett-Packard (HPQ). Like IBM and Cisco, both are members of the Dow Jones industrial average.

Intel, the world's leading maker of microprocessors, has had to cope with the deflating prices for decades and innovate like mad to hold off such rivals as Advanced Micro Devices. And HP, a leader in PCs and printers, has had to cut costs relentlessly to thrive in a crowded market.

The recession affected both companies. Consumers and businesses have delayed PC and printer purchases, hurting HP's results. In the first three quarters of the fiscal year that ends this October, earnings rose just 4% from the year-earlier period. The slowdown in PC sales prompted computer makers, such as HP, to deplete their semiconductor inventories, hurting chip makers. Intel lost $398 million, or 7 cents per share, in the April-June quarter, compared with profits of $1.6 million, or 28 cents a share, in the second quarter of 2008.

But consumers and businesses can delay purchases for only so long. Analyst Doug Freedman, of investment bank Broadpoint Gleacher, thinks there might be a bump in corporate PC purchases before the end of the year, as IT managers who had previously been encouraged to conserve cash learn they have to use or lose their budgets. "Server sales were better than people had expected in HP's latest numbers, which shows there's some semblance of corporate spending again," he says.

At $19.10, Intel trades for 34 times the depressed 2009 earnings estimates of 56 cents per share. A more meaningful price-earnings ratio is 17, a figure based on estimated 2010 earnings of $1.10 per share. At $44.68, HP trades for 12 times the $3.81 per share that analysts expect it to earn in the fiscal year that ends in October and 11 times estimated profits of $4.22 per share for the October 2010 fiscal year.




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