International Business Machines Corp.

Today many people seem sure that the subprime situation and associated problems will bring on a long-term market decline that could carry stock prices much lower. When conclusions like these become widespread, the conclusion or the timing or both are often wrong. Think back to how many people agreed with former Federal Reserve Board Chairman Alan Greenspan’s famous (or notorious) ‘irrational exuberance’ speech, in December, 1996. Yet nearly four years passed before the market hit its ultimate peak. In between the Greenspan speech and 2000 market peak, we went through a market setback in response to an economic crisis that started in Thailand in 1997....

BANK OF AMERICA CORP. $44.37, New York symbol BAC, has moved down lately along with most financial services stocks, mainly due to concerns over liquidity problems with securities backed by mortgages and other assets. That makes it difficult to assess the market value of these securities. Bank of America will take a $3 billion pre-tax charge in the fourth quarter of 2007 due to writedowns of asset-backed securities. That’s equal to 1.5% of its market cap of $204 billion. Bank of America still has $16 billion worth of these securities, including $12.1 billion tied to subprime mortgages, so it may face more writedowns if conditions worsen. Bank of America closed its subprime mortgage business in 2001, so its overall credit quality is still strong. Its retail banking, credit card and wealth management operations are also performing well....

AMERICAN EXPRESS CO. $59.28, New York symbol AXP, has agreed to sell its international banking business for $1.1 billion. That figure includes $212 million that Amex will receive over the next 18 months from the transfer of a related operation. To put these amounts in perspective, Amex earned $1.06 billion or $0.88 a share in the second quarter of 2007. The company will probably invest most of the cash in its core card and travel operations, or buy back shares. American Express is a buy....

DOW JONES & CO. INC. $55.00, New York symbol DJ, moved a step closer to selling itself to News Corp. after its directors advised stockholders to accept News Corp.’s $60-a-share cash offer. However, the deal requires the approval of the Bancroft family, which controls 64% of Dow Jones’ voting power through class B shares that carry 10 votes each. The family will probably make a final decision next week. So far, no other bidder for Dow Jones has emerged. If the family turns down the News Corp. offer, the stock will probably drop back to its pre-bid level of about $35. That would increase the likelihood of a class-action lawsuit, but that would probably be more an annoyance than an economic threat. The family isn’t obliged to sell simply because an offer came in above the market. We feel investors should hold....

INTERNATIONAL BUSINESS MACHINES CORP. $105.33, New York symbol IBM, has agreed to pay $745 million for Telelogic AB of Sweden. The price is equal to 40% of the $1.8 billion or $1.21 a share that IBM earned in the first quarter of 2007. Telelogic’s software helps its customers in the aerospace, defense, telecommunications and automotive industries streamline and test complex engineering projects. This is IBM’s 43rd software acquisition since 2001. Expanding by acquisition adds risk, but these purchases nicely complement IBM’s computer hardware and services businesses, and expand its client base. Software will probably account for half of IBM’s profit by 2010. IBM is a buy....

AVAYA INC. $16.08, New York symbol AV, moved up by more than $2 this week on rumors that it’s talking with other telecommunication equipment firms about a merger. It may also be negotiating with private investors. Avaya has no controlling stockholder, and its patents and strong position in the fast-growing Internet-based phone network market should make it an attractive takeover target. Avaya is debt free and has cash of $1.84 a share, which adds to its appeal. Avaya is now a hold....

INTERNATIONAL BUSINESS MACHINES CORP. $101 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.5 billion; Market cap: $151.5 billion; WSSF Rating: Above average) has increased its quarterly dividend by a third, from $0.30 a share to $0.40. The new annual rate of $1.60 yields 1.6%. The company also expanded its stock repurchase plan by $15 billion. It’s now authorized to buy back $16.4 billion, or about 10%, of its outstanding shares. That should increase IBM’s earnings per share in 2007 by between 12% and 14%. IBM has $10.8 billion ($7.20 a share) in cash, so it will have to finance at least part of the buyback with new debt. IBM’s long-term debt of $14.3 billion is 0.5 times equity, so it can comfortably afford to borrow more. Since it will have fewer shares outstanding, it can use the savings from dividend payments to pay down the extra debt....

HARTE-HANKS INC. $28 (New York symbol HHS; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 76.9 million; Market cap: $2.2 billion; WSSF Rating: Average) earned $0.39 a share in the fourth quarter of 2006, up 2.6% from $0.38 a year earlier. Strong gains from its direct marketing division offset lower income at its shoppers newspapers unit due to rising paper and postage costs. Revenue rose 4.1%, to $313.2 million from $301.0 million. The company also increased its quarterly dividend 16.7%, from $0.06 a share to $0.07. The new annual rate of $0.28 yields 1.0%....

INTERNATIONAL BUSINESS MACHINES CORP. $94 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) is the world’s largest computer company. It specializes in large, mainframe computers for corporations and governments. It’s also a leading maker of software. Revenue fell from $85.9 billion in 2001 to $81.2 billion in 2002 as the economy slowed and demand for new computers and services fell. Revenue grew to $89.1 billion in 2003, and to $96.3 billion in 2004, but fell to $91.1 billion in 2005 after the company sold its personal computer operations for $1.75 billion. Profits fell from $4.35 a share (total $7.7 billion) in 2001 to $3.95 a share ($6.9 billion) in 2002, but rose to $5.05 a share ($8.6 billion) in 2004. Total profit in 2005 slipped to $8.5 billion. But per-share earnings rose to $5.22 due to fewer shares outstanding....

INTERNATIONAL BUSINESS MACHINES CORP. $79 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) has agreed to buy FileNet Corp., which makes software that help companies manage their web pages, email and other electronic documents. Demand for this type of software is rising fast as companies shift from paper-based to computer-based transactions. To put the $1.6 billion purchase price in context, IBM earned $1.30 a share (total $2.0 billion) in the second quarter of 2006. That’s 14.0% more than the $1.14 a share ($1.85 billion) that it earned from continuing operations a year earlier. IBM has aggressively expanded its software business in the past few years, mostly through acquisitions of niche firms like FileNet. That’s because software earns higher profit margins for IBM than its other businesses. Although software accounts for just 20% of IBM’s revenues, it contributes a third of its profit. A bigger software business also enhances IBM’s computer services division, which supplies roughly half of its revenue and 35% of its profit....