Playing the Rise in Corporate Tech Spending

As IBM (IBM)’s positive earnings results suggest, corporate IT spending continues to rebound as companies pour chunks of their nearly $2 trillion in cash into upgrading technology that has been getting older since the beginning of the financial crisis. 

Among the biggest places where that money might get spent is in so-called cloud-related services – that enable companies to shift their IT applications from a fixed cost to a variable one that’s outsourced to other providers --  may grow at a 20% compound annual growth rate to $148.8 billion in 2014 from $58.6 billion in 2009, according to Gartner Group. As companies boost their spending on technology, which providers will benefit and which ones make the best investments now?

Corporate tech spending bellwether, IBM, beat expectations and raised its guidance after reporting earnings on Tuesday. Its operating earnings rose 21% to $2.41 a share -- beating estimates of $2.30 a share -- on revenues that climbed 5% to $24.6 billion. Not only that, but IBM boosted its EPS estimate for 2011 from "at least $13" to "at least $13.15." The results were strong due to new hardware, up 40%, and a rise in analytics software, up 20%, about which I wrote, that could account for $16 billion in 2015 sales.

In addition to IBM, three other companies that benefit from the rise in corporate IT spending reported strong results, according to Bloomberg:

• VMware (VMW) makes virtualization software that makes it cheaper for companies to store information. It beat operating profit forecasts of 42 cents a share by six cents and its sales grew 33% to $843.7 million. VMware is very expensive on a Price/Earnings to Growth (PEG) ratio of 4.56 (I think 1.0 is fair value) on a P/E of 114 with earnings forecast to rise 25% to $1.52 in 2012.
• Intel (INTC), benefiting from the presence of its chips in popular smart phones and tablets, enjoyed a 29% rise in EPS to $0.56 10 cents above estimates, and its $12.8 billion in revenues, up 25%, were $700 million higher than expected. Intel's PEG is 1.33 on a P/E of 10.5 with earnings forecast to rise 7.9% to $2.19 in 2012. If current trends continue, that growth rate could be very conservative.
• Juniper Networks (JNPR), the second largest maker of network equipment, rode a 21% increase in profit to 32 cents a share, meeting expectations. Juniper's PEG is 1.21 on a P/E of 34 with earnings forecast to rise 28% to $1.69 in 2012.

IBM, by the way, is far from cheap. Its PEG of 1.44 on a P/E of 14.3 on earnings forecast to grow 9.9% to $14.45 in 2012 may not be the best way to play the growth in corporate IT spending. Of the four, Juniper and Intel are the biggest bargains.