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IBM: Sterne Agee's Wu Calls Big Blue A 'Top Pick' For 2013

This article is more than 10 years old.

Stene Agee analyst Shaw Wu this morning pounded the table on IBM shares, describing the company as a top pick for 2013.

"With Hewlett-Packard and Dell struggling in recent years despite big efforts otherwise, we believe it has helped prove that IBM has a unique business model that is very difficult to replicate," he writes in a research note. "The market more or less accepts that Apple is very tough, with Google, Amazon and Samsung coming the closest, but we think the market under appreciates that a high barrier-to-entry also applies to IBM. In addition, we see easy comps in 2013 and a powerful upgrade cycle led by new Power 7+ processors and PureSystems."

Wu adds that "one of the most important lessons in recent years is that it is much more difficult than consensus thinking to replicate IBM's unique business model where it combines hardware, software and services and broad geographic reach in addressing the enterprise market."

He notes that about 60% of IBM's profits are recurring, making the business more predictable; he points out that software is 23% of revenue, while services are now 58% of revenue.

Wu contends that the Street overlooks the product cycle catalyst side of the IBM hardware story. "In the past, we have seen new Power and PowerPC processors help drive new server sales, which have in turn helped drive associated software and services," he writes. "The last big refresh was in February 2010 when Power 7 servers shipped with IBM shares around $120-$125 per share. We believe this helped drive accelerated revenue and EPS growth and hence a higher stock price where shares nearly doubled to $200 in February 2012 following a 2-year cycle. We believe Power 7+ could help drive a similar impact."

Wu keeps his Buy rating and $230 target on the stock.

IBM this morning is off 76 cents, or 0.4%, to $194.32.