This from Money Morning:

International Business Machines Corp. (NYSE:IBM) has “surprised” the market with flawless execution and strong profits.

A few months ago, I congratulated my nephew for getting an internship with IBM, while he studies business in Argentina.

“It is a superb global company, with a bullet-proof business model and a balance sheet that gives them a huge sustainable competitive advantage,” I said, advising him to use the opportunity to find his way to a permanent job with the company for after he graduates.

With its recent financial results, IBM made me look very prescient, and made my advice to my nephew look very shrewd, indeed. Despite the total meltdowns of the U.S. and global economies last October, IBM executed flawlessly and handily beat analysts’ earnings estimates, expanding both its margins and its profit outlook for 2009. And these two bottom-line-related improvements were made despite a slight drop in sales, which stemmed chiefly from the currency effects of an appreciating U.S. dollar.

The bottom line: IBM reported a 2008 fourth-quarter profit that was up 12% from the fourth quarter of 2007. The company earned $4.4 billion, or $3.38 a share, a result that was up 21% from the $2.80 a share from the year before. Analysts had expected IBM to earn only $3.03.  Total revenue was $27 billion, a slight decline from the $28.9 billion reported the year before.

Last Tuesday, IBM – also known as “Big Blue” – said it expects fiscal 2009 earnings of at least $9.20 per share. That’s nearly 5% better than the consensus estimate of $8.77, according to analysts surveyed by Reuters Estimates

This is just one more that Wall Street “surprisingly” got wrong.  In what has been a constant during this financial crisis, companies in industries ranging from steel to high tech have handily exceeded earnings estimates.

A notable exception, of course, has been the financials, where the companies saddled with subprime mortgages have been forced to mark down their portfolios to ridiculously low “market” prices (there is no market) on packaged securities that are trading at a fraction of their theoretical value. This, in turn, is affecting the equity of banks, and therefore their ability to lend.

In such an environment, many analysts adopted an “end of the world” scenario, where companies halt every possible activity in order to preserve cash.  So fund managers that went into premier high tech companies keep getting rewarded now, as these companies report, while their year-end performance metrics were distorted by Wall Street’s bearish bias.

Clearly, Wall Street’s extremely bearish perception is wrong, given the resiliency of the company’s business model.  The virtue of IBM’s model is that it has effectively transformed itself from the cyclical hardware company that gave it its name into a software-and-service-oriented firm that gives it a recurring revenue stream. In addition into this well-thought-out business model that concentrates on high-margin, value-added businesses.

Success with this strategy is due to IBM’s integrated approach to providing a total solution to its clients around the globe, which encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing..

That last issue – financing – is crucial these days. And IBM’s long history in the world’s markets has given the company a longtime of recognition abroad, which really helps mitigate competitive threats from unproven newcomers.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

Geographically, most of the growth continued to come from the so-called “BRIC” countries (Brazil, Russia, India and China), which grew at a 13% clip, and within the emerging markets, which as a whole grew at a 6% clip. Underscoring the soundness of IBM’s global business was the fact that growth was essentially flat for the hard-hit U.S. market. This geographic shift and segment emphasis resulted in higher profit margins, which have more than doubled, causing earnings per share to more than triple in the last six years.

IBM’s global services – which include global technology and global business services – accounted for 53% of fourth quarter sales, while software delivered 24% and systems-and-technology 20%.  Very importantly, new deal signings amounted to a robust $17.2 billion, which gives IBM a solid outlook for 2009.  This evidenced a 20% growth from strategic outsourcing.

What we have here is a solid-and-growing revenue stream, matched with 9% growth, even in software, and a solid outlook.

An area of vulnerability could be financial services, which accounted for 30% of the company’s business.  Fortunately, the U.S. market – which has suffered the most from the global-financial downturn – only accounts for about a quarter of this business. Another challenge is the more-cyclical segment of systems and technology – mainly servers and storage – mainly servers and storage, which accounts for about 20% of sales, experienced a 16% decline in revenue and a 6% decline in margins.

But margin growth of 4.8% and 5.6% in IBM’s much-larger global-technology-services and global-business-services business segments more than compensated for this, resulting in overall margin expansion of 3% from last year.

Most importantly, IBM has a bullet-proof balance sheet and a fantastic cash flow of $7.9 billion. In times when others are suffering, IBM keeps producing a steady and increasing cash flow, and this financial strength allows the company to provide financing to its customers and keep sales rolling in. This is key; it enables IBM to either cherry-pick business from damaged competitors or buy them outright at cheap valuations.

Hence, IBM’s business model has been precisely been retooled over many years to face moments like this and thrive. If there’s a business lesson here it’s that the strong and resilient not only survive, but run away with the market. IBM’s stable and recurring revenue, geographic diversification, focus on higher-value-added business, and financial strength grants it invaluable defenses against both economic and competitive threats.

Recommendation:  With the earnings surprise and the market’s sudden reversal, the shares of International Business Machines Corp. (NYSE:IBM) have rallied aggressively.  But the story is still intact.  What’s more, the many stimulus plans being implemented around the world will no doubt increase demand in many of IBM’s product-and-service areas. Even the huge consolidation in banking and other industries will boost demand for information-technology products and services.

Hence, the upside is still under-appreciated at the current valuation.  At a forward Price/Earnings (P/E) ratio of less than 10.0, and a Price/Earnings to Earnings Growth Rate (P/E to Growth Rate) ‘PEG ratio’ of about 1.0, the shares of this growing company with strongly reliable earnings deserves much higher multiples.  I would not be surprised to see IBM’s stock price going up by 50% over the next couple of years. Buy half a position right now and complete the remaining half by buying on days of market weakness before IBM’s next earnings report. Plan on putting the shares away for two years.

Source: Buy, Sell or Hold: IBM Has Found a Formula for Growth – Even During a Recession

This from Today’s Financial News:

It is do-or-die time in corporate America. If companies do not get their finances in line and make a turnaround during the first quarter of 2009, their days as a going concern are over.

Indeed, the bankruptcy courts will be busy as we countdown President Obama’s first 100 days in office, but that does not mean we will not see long lines of investors cashing in their market-creaming gains. This is a time of great flux in the American markets, which requires savvy, well-researched investing techniques.

Make the right choices and the next 100 days will be like no other. Make the wrong choices, and you will be begging for the good ‘ole days of the Bush administration.

When the final closing bell of 2008 rang, the Dow closed the year with a price/earnings ratio of 13.27. While that figure is about 10% below the historic average of 15, you will quickly realize it is quite high if you have been tracking the amount of 2009 earnings forecasts that have been dramatically slashed.

Scores of companies across all industries, including bellwethers like Johnson & Johnson (NYSE:JNJ), have cut their 2009 earnings forecasts. That means P/E ratios, the most basic of financial measurement tools, are screaming that shares of many companies remain intensely overvalued.

While the bears are raising hell on Wall Street, there are a few straggling bulls roaming free – more than enough to give investors a very real shot of actually smiling the next time they open their 401(k) statement.

Over the next few minutes, I want to share three dangerous companies you should keep your distance (and your savings) from and three that you should be socking every spare dollar you can find into. All of them will make significant moves during the first 100 days of Obama’s presidency.

Let’s start with the companies that will be around to see all of Obama’s presidency. There may be less than you think.

The winners…

No matter what happens to the economy or who is leading the government, Americans are always going to get sick and they are always going to get old. Granted, how much we pay for our healthcare and who pays for it will always be a hot debate, but we all know Obama is not going to revolutionize the nation’s healthcares system in just 100 days.

That means The Ensign Group (NYSE:ENSG) is worthy of your investing dollars. The company specializes in nursing and rehabilitative services in the western section of the nation, an area that attracts the company’s target demographic like moths to a streetlight.

While so many other companies are contracting, Ensign is expanding at an exciting clip. Not only is this $330 million company using some of its $56 million in cash to buy its competition (it finalized two deals earlier this month), it is increasing the amount of its earnings it sends directly to its consumers by 12%.

That’s right, while countless companies were cutting their dividends, Ensign raised its investor reward. With an annual payout of just $0.18, which represents just 1% of the current share price, the dividend is not much, but the folks that have studied signaling theory known this is an extremely bullish signal from the company’s management team.

In fact, the company’s CEO, Christopher Christensen, recently said of the increased dividend, “ It reflects our continued confidence in our operating model, and in our ability to return value to our shareholders in a difficult economy.”

He is not lying.

Some other important things to know about this company:

- It has a current ratio of over 2, meaning it will have no problem paying its bills even in this shaky credit market.

- It is expected to post earnings growth of over 15% over the next five years.

- Its share price performance has beaten the pants of the major equities over the past six months (look at the chart.)

The Ensign Group is a well-managed company with a high-demand product that does not suffer at the mercy of consumer demands. Its books are squeaky clean and its management team is signaling that things are only going to get better.

That is all the reason you need to put shares of this company in your portfolio.

Spinoffs are good

Wall Street does not like General Electric (NYSE:GE) right now, but it since the market reached its lows in November, one of its former subsidiaries has surged by more than 35% and shows no indication of slowing down.

In 2005, Genpact (NYSE:G) was spun off of GE Capital, with equity investments from General Atlantic and Oak Hill Capital Partners. The public did not get a shot at the new company’s revenue stream until 2007.

Since going public less than 18 months ago, Genpact’s earnings made significant gains. During its first quarter as a public company, the company lost $8 million. Last quarter, it showed investors its true potential with earnings of nearly $34 million on just $270 million in sales. That’s a 12% profit margin.

Genpact makes these profits by maximizing profits for other major companies spread throughout the world. It specializes in providing process and analytical insight that allows companies to squeeze every penny of potential profit from their operations.

Have you read the stories lately of companies refining their process, working to increase their margins and eliminate operations waste? If not, I can tell you I could wallpaper my office in the articles printed just this week.

When the economy is on the rocks, consumers are not spending and revenues are plummeting, companies must do everything they can just to stay in business. That is why they turn to Genpact.

If the company started under the eye of Jack Welch, you know it contains his core values to this day. What could possibly be a better investment in a time of economic contraction than a company that specializes in helping companies get back on track?

Genpact is a $1.8 billion company with $315 million in cash, just $113 million in long-term debt and has seen its earnings rise by an average of 30% per quarter since becoming a public company.

If Genpact can get the rest of the nation’s businesses to look so appealing, the economy will look better in no time.

Buy what you know

So far we have looked at companies that are considered growth investments. Any well-managed portfolio has a proper allocation of growth and value prospects. That means we need a company that is selling for pennies when it should be selling for dollars.

Prestige Brands (NYSE:PBH) may not be selling for less than a buck a share, but it is definitely trading for a fraction of its true value. A single-digit P/E multiple of 9 proves it.

This company is all about the value of its brand. You may know the company through its Comet, Spic and Span, Cutex or its Chloraseptic brands. Chances are, if you open any bathroom or below-sink cabinet in your house, the company’s products will be right there in your face.

Investing in this company is the definition of investing in what you use, the strategy Warren Buffet used to get rich.

But it takes more than a few powerful brands to make a winning investment. It takes a strong set of books and an undervalued share price. Of course, Prestige has both.

Let’s go back to that single digit P/E. In this economy, financial figures from the past mean very little as earnings can change with the wind. But Prestige is expected to announce quarterly earnings that are down by just a few pennies per share even in the heat of a nasty recession. That means, unless share prices rise (my bet) we will continue to see a rock-bottom ratio.

When it comes to managing its debt, the mature company does quite well. Over the next twelve months, Prestige has just under $38 million in bills. With nearly $89 million in short-term assets and anticipated continued positive cash flow, the company has more than enough in reserves to see it through these economic doldrums.

Shakespeare asked, “What’s in a name.” Prestige proves there is a lot more than a shot at love riding on its brand names.

Check out Prestige Brands and the two other stocks I mention and see if they fit your portfolio.

As for the three stocks you absolutely must avoid over the next 100 days, well, you will just have to check back in here tomorrow afternoon.

Source: The three best (and worst) stocks of Obama’s first 100 days

This from Taipan Daily:

Key Energy Services (NYSE:KEG) is the largest rig-based well service company in the world.

You could say the main job for a company like Key is to “keep the oil & gas flowing.” Once a well is drilled, that well has to be maintained and serviced throughout its life. This is what Key does.

It’s a great business because you always have clients and you always get paid. The world is not going to give up its oil and gas addiction any time soon… and as long as we need fossil fuels, we’ll need companies like Key.

Being the largest well service company in the world, Key also has one of the most attractive client rosters in the world. The company’s client list is populated with blue-chip names like BP, ExxonMobil, ConocoPhillips, and others.

Key’s operations are primarily in the U.S., but the company is also expanding in energy-rich places like Russia and Mexico. The rising trend of NOCs – nationalized oil and gas companies – is good news for a player like Key.

While oil rich governments are happy to take over the means of production and shut out the oil majors, it’s often the case that the host country is short on technology and expertise. So they invite in savvy outsiders like Key to come service the wells (and to provide other high-margin services on the side while they’re at it, like equipment rental).

An Undisputed Market Leader

It’s also important to note that Key Energy Services is the undisputed market leader in its field. In a challenging oil and gas environment like the one we’re now in, being the market leader carries a number of advantages. For example:

Key has a higher class of customer due to its focus on top-notch service, training and equipment (and its willingness to invest in all three areas). Because Key’s customer base runs more to the “big boys” – supermajors, large independents and so on – Key is less likely than smaller competitors to take a revenue hit from reduced customer spending.

Key is able to charge a premium for its services because of its position as a market leader (and reputation for quality levels above and beyond the competition).

Key’s balance sheet is secure; the company’s long-term debt doesn’t mature until 2012, and cash levels and credit lines are healthy. This is a BIG edge in comparison to Key’s smaller competitors, many of whom are seeing their liquidity dry up.

Key Energy Services has a little bit of leverage on its balance sheet – long-term debt closes in on $600 million – but that’s forgivable because the debt has years to maturity, and as a well service company, Key’s cash flow comes in like clockwork.

Key’s Powerful Growth Rate

One of the truly unbelievable things about Key right now is the valuation. As of this writing, Key trades for 3.73 times earnings.

This is amazing because of the powerful growth rate Key has booked in recent years. The slide below is from a recent Key presentation at the 2008 Bank of America Energy Conference.

As the chart shows, Key has kept up a better than 15% compound annual growth rate (CAGR) for the past four to five years. If that pace continues, revenues will double in the next five years. And even if Key’s growth rate were to fall by half, revenues would still double in a decade. Higher revenues mean fatter profit margins for a well service company like Key, by way of cost efficiencies and greater operating leverage.

And yet, in spite of all that, Key now trades for three to five times earnings due to the panic. Three to five times earnings!

That means somebody with a big enough chunk of cash (or the right financing) could hypothetically buy this healthy, vital, steadily growing, blue-chip-plated business for a song… and have the earnings stream pay for their whole purchase in three to five years!

For a rock-solid business with steady cash flow and blue-chip customers, that kind of value is unheard of.

The only reason we are seeing opportunities like this is because small investors are panicked and the big institutions are tapped out. All the asset managers who would normally be backing up the truck for companies like Key have instead been forced into a defensive crouch.

These types of bargains won’t last forever. When sanity returns to markets and oil resumes its long-term rising uptrend (as it certainly will do), Key could again become a $20 stock. That would be a more than 300% gain from today’s levels.

Action to take: Buy Key Energy Services (NYSE:KEG) up to $6 per share.

PS. This is the first of a five-part free report “Five Stocks To Grow Rich On” from the Taipan Publishing Group. Follow the link below to find out more.

Source: A Deep Well Of Profits