5 Tech Giants to Buy Now

Corporations are starting to emerge from their bunkers. Now that the economy has stabilized, the companies still standing can move from worrying about their survival to thinking about retooling for the slog ahead. Businesses will need to become leaner to thrive through a long period of tepid economic growth.

One way for businesses to become more efficient is to upgrade their technology, and when they do, the five companies described below should benefit immensely. These steady Eddies cover all the bases of corporate information-technology spending, and they are well positioned not only to capitalize from a near-term pickup, but also to expand their core businesses over time. (In case you’re wondering, Apple didn’t make the cut because of its strong consumer orientation. And we left Microsoft off the list because of questions about its long-term direction -- particularly whether its line of defense against Google will hold.)

IBM (symbol IBM)

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In the world of tech and beyond, you won’t find many companies more stable than International Business Machines. Big Blue, once synonymous with PCs and large, mainframe computers, has remade itself into a software and technology-services powerhouse. IBM’s services segments accounted for 59% of its $45 billion in revenues during the first six months of 2009. Businesses not only hire IBM to do things such as overhaul the way they use technology internally, they also enlist IBM’s help for projects you might associate with a conventional management-consulting firm, such as developing a human-resources strategy.

IBM’s next-largest segment is software, which accounted for 21% of revenues in the first half of ‘09. IBM’s software business is obscenely lucrative, sporting a gross profit margin (sales minus cost of goods sold, divided by sales) of 85%.

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 same period a year earlier, and the company has upped its dividend twice, to an annual rate of $2.20 per share, since the beginning of 2008 (the stock yields 1.8%). 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). Year-to-date through October 8, IBM’s stock climbed 48%.

CISCO SYSTEMS (CSCO)

Shares of Cisco Systems are about as close as you can get to 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. Web users, he adds, “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 information-technology managers are loath to switch from a trusted brand. Cisco has bred an army of techies 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 more than twice the market value 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. For fiscal 2009, which ended July 25, sales declined 9%, to $36 billion, from the previous year, and profits per share declined 13%, to $1.35. But analysts expect profits to snap back by the July 2011 year, and investors, who have driven up the stock 45% this year, appear to agree.

EMC CORP. (EMC)

The amount of digitized data that companies must store is swelling -- a trend that won’t end anytime soon. That virtually guarantees steady growth for EMC Corp., a leader in data 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. EMC currently claims about 25% of this market. Its strategy is to sell customers both the low-profit hardware they need for storage and the highly profitable software they need for smoothly accessing stored data.

Through its 84% stake in VMware, EMC is also “the leader in virtualization technology,” says fund manager 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 Madison Mosaic Investors fund.

The recession finally caught up with 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. Still, the shares popped 70% so far this year.

INTEL (INTC) and HEWLETT-PACKARD (HPQ)

Over time, technology hardware has turned into something of a commodity business. That has led to cut-throat competition and shrinking profit margins. Still, there’s something to be said for the resilient giants that have dominated through such adverse conditions: Intel and Hewlett-Packard. Like IBM and Cisco, both are members of the Dow Jones industrial average.

Intel, the world’s leading maker of microprocessors, has coped with deflating prices for decades and innovated like mad to hold off rivals such as Advanced Micro Devices. And HP, a leader in PCs and printers, has 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 ended in October 2009, earnings rose just 4% from the year-earlier period. The one bright spot in its business in the most recent quarter was its services segment, which specializes in IT outsourcing: Thanks to HP’s 2008 acquisition of EDS, revenues in the services segment increased 93%, to $8.5 billion.

The slowdown in PC sales prompted computer makers such as HP to deplete their semiconductor inventories, hurting chip makers. Intel earned just $231 million in the first six months of 2009, thanks to a loss in the second quarter, compared with profits of $3 billion in the first six months of 2008. Despite those numbers, the company says it is already beginning to see stronger demand as its customers grow more confident about their business prospects.

After all, customers can delay purchases for only so long. Analyst Doug Freedman, of investment bank Broadpoint Gleacher, thinks corporate purchases might bump up before the end of the year, as IT managers learn they have to use or lose their budgets. Plus, better-than-expected sales of servers during HP’s May-July quarter “show there’s some semblance of corporate spending again,” he says.

Both firms hold plenty of cash as a cushion in case the recovery doesn’t pan out as hoped: Intel has $11.6 billion, and HP holds $13.6 billion. Shares of HP and Intel advanced 29% and 39% year-to-date, respectively.