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What’s in Store in 2012 for IBM, Microsoft and Oracle's Stock

Three of the standard bearers in the software development, services and hardware market have delivered consistent growth in revenues, earnings and dividend payments in 2011. The year ahead presents challenges in the changes that are taking place in the software services, virtual platforms and cloud computing, and the following companies have laid the groundwork for their performance in 2012. While some of them have gone about it in a more newsworthy manner through acquisitions, namely Oracle (ORCL), IBM (IBM) and Microsoft (MSFT) have demonstrated a steady path of partnering with software developers for sales. For example, IBM has an original equipment manufacturer and reseller agreements with QLogic (QLGC), Juniper (JNPR), Cisco (CSCO) and Voltaire, and Microsoft has partnered with Citrix (CTXS). IBM trades around $184 and has a year low of $146.64 and a year high of $190.53.

The results from its most recent quarter indicate revenue growth going forward. The company had third-quarter revenue growth of eight percent and delivered earnings per share of $3.28 up 15% from the previous period in 2010. Software profit was up 12%, driven by branded middleware revenue growth of 17%. Hardware profit was 8%. Services delivered strong profit with the pre-tax income from that sector up 13%.

The company turned a profit this year with an operating net income up nine percent, delivering in increase in earnings per share of $3.28, up 15% from the year prior. The company delivered significant value to shareholders, with dividend distributions at $3 per share on a forward basis, off of a 22% payout ratio.

Growth in North America, divided by Canada and the U.S. segments, were up seven and four percent, respectively, and driven by software business and performance in Power Systems sales. In Europe, Spain led growth at nine percent and the U.K. was up five percent. Software and service sales will remain very product-driven going forward; however, I expect the first few months to give IBM a boost after several years of sluggish replacement rates by likely buyers.

Through careful management of currency hedging, the company has managed to deliver consistent positive returns from all geographic areas. These hedging programs mitigated losses and reduced some gains but managed to keep the growth figures in positive territory. Consistency warrants a higher earnings multiple, with all else equal.

Outsourcing of integrated technology services showed revenue gains at 10% at constant currency. Application outsourcing was up five percent at constant currency. In many cases the hedging programs brought these gains down from double to single digits; however, the company wisely chose the spread risk and remain conservative with respect to currency fluctuations and delivered solid, respectable gains in an uncertain world economy.

The future plans involve building great services business in the growth markets, continuing to gain ground in cloud business analytics and their Smarter Planet products. The company plans to use all these facets to drive solid profit growth. The plan seems to be working.

Oracle Inc. (ORCL) stock trades around $26 has a year high of $36.50 and a year low of $24.72. The most recent quarterly report for the second quarter of 2012 indicates earnings per share of $1.82 and cash of $31 billion and debt of $14.78 billion. Total revenues were up 2% to $8.8 billion $2.2 billion of that was represented by new license revenues. Both product support and license revenues were up 9% to $4 billion. Hardware system products revenues were down 14% to $953 million. Operating cash flow over the last 12 months grew to $13.1 billion; that’s up 45% compared to the preceding 12-month period.

Oracle expanded its worldwide sales force adding 1,700 sales professionals in the first half of 2012. Oracle also announced the authorized buyback of up to $5 billion in common shares in future quarters. Oracle declared a dividend of $0.06 per share adding to its consistent dividend payments since commencing them in 2004.

New product lines and further penetration into cloud computing and servicing are expected to drive further growth in 2012. Any upward movement in Oracle’s share price is probably dependent on the success of its new licensing revenues, the performance of its expanded sales force. Oracle has an ongoing patent dispute with Google (GOOG). Oracle purchased Java programming language from Sun MicroSystems in 2010.

Oracle claims that Google’s android applications infringe the claims of its Java patents. Should the outcome of its litigation with Google not be in Oracle’s favor, the share price will suffer because of the costs associated with the litigation and any damages it may have to pay Google. If Oracle prevails, the impact will not only be negative for Google but for all Java-based android developers. Oracle will be able to monetize its acquisition of the Java language and capture significant market share of the android market.

Microsoft’s common shares trade around $26. It has a year high of $29.46 and year low of $23.65. Its forward P/E ratio is 8.39. The expected P/E growth ratio sits at 0.95. Microsoft has a five-year average dividend rate of 2% with a forward rate of 3.10%. Microsoft is cash rich with a net cash position of $55.94 billion against debt of $22.05 million.

Microsoft has paid regular quarterly cash dividends since 2004 which started at $0.08 per share and grown to $0.20 per share this year.

Microsoft’s stock is a stable investment hold in this market. Microsoft has made announcements in 2011 that indicate it is ready to compete with VMware (VMW), Salesforce (CRM) and Oracle (ORCL) in the virtualization and cloud space; however, the announcements have had very little impact on the stock price.

Microsoft’s innovations have been viewed as lackluster in the past five years and perhaps the stock is suffering from this image problem. If their solutions are best of breed, Microsoft is not getting this message out to the public. As it stands, the company has demonstrated good fiscal responsibility by delivering consistent earnings and dividends, managed its cash and debt positions in difficult economic times and continues, at present prices to deliver good value to its investors. It may not be good for a lot of upside, but there is very little downside risk in the share price.

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