IBM - International Business Machines

[prevalou]

fifteen years track record

[rogermunibond]

 

She said 50% of IBM's employees are millennials. I couldn't believe me ears. If that is the case, that is not your grandfather's IBM anymore and has the potential to do well on the innovation front. Maybe sort of a young genius being mentored by the old guard. A new meets old culture. I've seen this work very well in other fields, even Buffett is a fan of this kind of dynamic.

 

IBM used to break out employees by location, iirc, in the mid 2000s they stopped doing this. So it is quite conceivable that this millennial employment boom is in India or other IT service consulting hubs.

[PatientCheetah]

IBM's R&D is shrinking as % of sales on declining sales...

[KCLarkin]

IBM's R&D is shrinking as % of sales on declining sales...

 

http://recode.net/2014/07/08/does-spending-big-on-research-pay-off-for-tech-companies-not-really/

 

The result: Companies that spent the most on R&D tended to have shares that underperformed the markets over time, and also relative to those companies that spent less.

[orthopa]

I started a new position in IBM last week. Market seems very transfixed on revenue numbers. Right after earnings release all the headlines I read cited decreased revenue in a negative slant. This has been a market focus and I get it but I am not as concerned as the market is.

 

Here is what I see.

 

Buffet owns a huge stake. Obvious I know but this man has read the IBM annual reports for what 50 years? Knows accounting way better then me, and has unlimited access to management.  As the price goes down he continues to add. Isnt this what he preaches? Buy good companies at good prices? Is IBM a good company? Sure its a great company and selling cheaply. Many say its not because it hasnt grown revenue, has been performing financial engineering, and the stock price has gone no where.

 

Has the stock price gone no where because the company is less valuable on a per share basis or because the market has pulled in its multiple?

 

Is a 3.7% dividend and aggressive buyback at a single digit multiple that bad of a thing?  Value investors avoid companies because they have no earnings in light rapid revenue growth and buyback stock at an inflated multiple. Is this not the opposite?

 

Yes the share price has gone no where for years but in the last 10 years

 

Revenue has gone from 91-92 B

Gross margins 40.1-50%

Operating margins 10.3-19%

Div .78 to 1.30 a share

Shares 1.6B to 1B

FCF per share 5.44 to 12.6

 

Looks like value has been created to me. Returns blow compared to the S&P due in large part to multiple compression of IBM and expansion for the market.  ANY revenue growth will add to returns significantly and the market will become excited again.

 

This is a classic Graham voting/weighing machine situation. We have read that we will make money as value investors buying companies at depressed values and selling them once the market recognizes value. I think its unrealistic to think that IBM will never grow revenue again. True IBM may never see rapid "tech" revenue growth but I believe that any growth and signs of a "revived" IBM will allow purchases now to realize full value.

 

Im happy to buy at these prices.

 

 

 

[Dalal.Holdings]

Has the stock price gone no where because the company is less valuable on a per share basis or because the market has pulled in its multiple?

 

Is a 3.7% dividend and aggressive buyback at a single digit multiple that bad of a thing?  Value investors avoid companies because they have no earnings in light rapid revenue growth and buyback stock at an inflated multiple. Is this not the opposite?

 

Yes the share price has gone no where for years but in the last 10 years

 

Revenue has gone from 91-92 B

Gross margins 40.1-50%

Operating margins 10.3-19%

Div .78 to 1.30 a share

Shares 1.6B to 1B

FCF per share 5.44 to 12.6

 

Looks like value has been created to me. Returns blow compared to the S&P due in large part to multiple compression of IBM and expansion for the market.  ANY revenue growth will add to returns significantly and the market will become excited again.

 

This is a classic Graham voting/weighing machine situation. We have read that we will make money as value investors buying companies at depressed values and selling them once the market recognizes value. I think its unrealistic to think that IBM will never grow revenue again. True IBM may never see rapid "tech" revenue growth but I believe that any growth and signs of a "revived" IBM will allow purchases now to realize full value.

 

Im happy to buy at these prices.

 

Great post. Contrarian investing does not jive with most people. Those who look at these opportunities tend to be rewarded. It's Graham's key insight (Mr. Market) that hasn't lost any value to this day.

 

Growing revenue is not as hard as people think it is. It's actually very easy when you have $14B of free cash every year to grow revenue (hint: you just buy companies with "revenue" indiscriminately). That IBM management has had restraint when deploying capital despite hysterical calls about its shrinking revenue (over only a few years) speaks volumes about where their priorities lie to us (they value shareholders even though many don't see it that way).

 

We much prefer IBM to cash hoarding, foolish acquisition making tech companies.

[fareastwarriors]

Another 52-week low today. Longs should be happy.

[LowIQinvestor]

Time for Drunkenmiller to do some more media appearances to talk up his short thesis?

 

I find his crusade against IBM odd....

 

Wonder what his track record is like since closing up shop in 2010?

[Picasso]

I wouldn't worry about Druckenmiller's track record since closing up shop.  He's one of the better investors out there.

 

I would worry more about the fundamentals of IBM.  This whole "we get to repurchase more shares more cheaply" is BS.  The stock is going down because net profits are going down.  The only way you make more money here is if this is a temporary/non-secular downturn in the business and they repurchase a bunch of shares before things get better.  If you couldn't see the net income dropping, what makes you think you can see net income rising in a few years?

 

90% of you guys wouldn't be in IBM if it wasn't for Buffett.  I thought I would get interested in the stock once they get rid of Ginny, but you also need to get rid of the copy cat value investors who were just as wrong as Buffett.  When that happens, it wouldn't be shocking to see IBM stop their repurchase program as they redirect capital to turning around the business.  Good luck with the margin of safety on that one.  Plus all their acquisitions/acquihires are a form of capex that needs to be subtracted from free cash flow. 

 

Still looks really early to be going long IBM here.  Lightning struck the same spot a few times as IBM reinvested itself before.  You guys are expecting lighting to strike the same spot again as if the last times didn't involve some amount of luck and strong management.  Just seems like everyone is downplaying the risk here.  I wonder if having Buffett as a large shareholder has lulled management into thinking things aren't that bad.

[enoch01]

I wonder if having Buffett as a large shareholder has lulled management into thinking things aren't that bad.

 

This is a really good point.

[LowIQinvestor]

I wouldn't worry about Druckenmiller's track record since closing up shop.  He's one of the better investors out there.

 

Not worried about it, just curious... Wasn't he more of a macro trader?

 

I'll be worried about IBM if cash flow from operations and Gross margins deteriorate meaningfully.

 

[scorpioncapital]

In Fischer's book he has a 3 year test. While IBM failed that test slightly on price since Berkshire's purchase in 2011, that test is based on intrinsic criteria with some % component to price. In other words, it's almost 5 years but if the internal metrics of the original investment have not changed, Fischer would advocate still holding. In other words, having an inner scorecard vs an outer one (stock price). Probably Buffett still believes the internal factors for the investment are still alive and well.

[ERICOPOLY]

Isn't revenue from continuing operations only down 1% in the latest quarter if you back out the currency movements and a divestiture?  Revenue was down 14% including the currency movements.  So currency movement juiced the decline in revenue by 1300 basis points.

 

Here were the last quarter numbers for net income:

 

14 percent decline in net income( GAAP )

11 percent decline in net income (non GAAP)

 

It's tempting to be lazy and back 1300 basis points out of the net income numbers

 

1% net income decline (GAAP)

2% net income increase (non GAAP)

 

It sort of looks like they'll have revenue growth in a few years as their  "strategic imperatives" (which are growing rapidly) become a larger portion of the pie?

 

 

 

[KCLarkin]

Isn't revenue from continuing operations only down 1% in the latest quarter if you back out the currency movements and a divestiture?  Revenue was down 14% including the currency movements.  So currency movement juiced the decline in revenue by 1300 basis points.

 

Here were the last quarter numbers for net income:

 

14 percent decline in net income( GAAP )

11 percent decline in net income (non GAAP)

 

It's tempting to be lazy and back 1300 basis points out of the net income numbers

 

1% net income decline (GAAP)

2% net income increase (non GAAP)

 

It sort of looks like they'll have revenue growth in a few years as their  "strategic imperatives" (which are growing rapidly) become a larger portion of the pie?

 

Currency impact was 9%. The System X sale accounts for the rest. This division was unprofitable, so it wouldn't have same impact on bottom line.

[Guest Grey512]

Screens cheap on an optical basis and IBM apparently is still a top 5 brand globally (behind Apple, Google, Coke), so I am watching this as a potential long.

 

Still not pulling the trigger due to Ginny - I dont trust her. It feels like she refuses to acknowledge the problem(s). Picasso's post captures some of the product issues that IBM has. When I look at IBM's P&L and the website, I kinda think "why should IBM continue making money and charging the prices that they are charging for the products that they're selling?". I cant get my hands around what is the moat here. Why should IBM exist? Why can't a host of existing and new competitors continue displacing IBM?

 

The game is getting harder in the tech space. Some of these large hulking tech behemoths have no reason to exist 10 yrs from now, IMO. IBM might be in that camp.

 

What is the catalyst for value realization here? I'm not sure it's Ginny. I'm not sure it's in IBM's products. Perhaps IBM should be broken up and some parts spun-off. But there's a catch-32 in that scenario: IBM's greatest strength is its brand, IMO. Without the brand, IBM is nothing special. How do you split up a company and keep the brand strength? HP is trying to do that but I have no idea how that whole story will play out.

 

I agree though that 80% of the people here who are long IBM would probably not be long IBM if it wasn't for Buffett. Like it was with ZINC and VRX, that does signal...something.

 

The King is not infallible, IMO, BTW.

[ERICOPOLY]

Isn't revenue from continuing operations only down 1% in the latest quarter if you back out the currency movements and a divestiture?  Revenue was down 14% including the currency movements.  So currency movement juiced the decline in revenue by 1300 basis points.

 

Here were the last quarter numbers for net income:

 

14 percent decline in net income( GAAP )

11 percent decline in net income (non GAAP)

 

It's tempting to be lazy and back 1300 basis points out of the net income numbers

 

1% net income decline (GAAP)

2% net income increase (non GAAP)

 

It sort of looks like they'll have revenue growth in a few years as their  "strategic imperatives" (which are growing rapidly) become a larger portion of the pie?

 

Currency impact was 9%. The System X sale accounts for the rest. This division was unprofitable, so it wouldn't have same impact on bottom line.

 

Right, that was in the press release that I was reading the numbers from.

 

1% isn't that bad overall if there are higher margin businesses growing at a fast pace.

 

Is it the case that those businesses aren't growing as fast as expected, or is it that the others are declining faster than expected?  I would think the answer to that is important.

 

It is a lot worse if their "strategic" fast growers are disappointing their prior expectations, and really not nearly as much of an issue if their declining businesses are declining faster than originally thought. 

[arcube]

Screens cheap on an optical basis and IBM apparently is still a top 5 brand globally (behind Apple, Google, Coke), so I am watching this as a potential long.

 

Still not pulling the trigger due to Ginny - I dont trust her. It feels like she refuses to acknowledge the problem(s). Picasso's post captures some of the product issues that IBM has. When I look at IBM's P&L and the website, I kinda think "why should IBM continue making money and charging the prices that they are charging for the products that they're selling?". I cant get my hands around what is the moat here. Why should IBM exist? Why can't a host of existing and new competitors continue displacing IBM?

 

The game is getting harder in the tech space. Some of these large hulking tech behemoths have no reason to exist 10 yrs from now, IMO. IBM might be in that camp.

 

What is the catalyst for value realization here? I'm not sure it's Ginny. I'm not sure it's in IBM's products. Perhaps IBM should be broken up and some parts spun-off. But there's a catch-32 in that scenario: IBM's greatest strength is its brand, IMO. Without the brand, IBM is nothing special. How do you split up a company and keep the brand strength? HP is trying to do that but I have no idea how that whole story will play out.

 

I agree though that 80% of the people here who are long IBM would probably not be long IBM if it wasn't for Buffett. Like it was with ZINC and VRX, that does signal...something.

 

The King is not infallible, IMO, BTW.

 

I have a similar feeling about Ginny. Changing IBM for future might be beyond her pay scale. One catalyst that I can think of would be an outsider CEO. Oracle has two CEOs and I am not sure how long they will coexist.  Just a wild thought!

[scorpioncapital]

What exactly is she doing wrong?

 

[ourkid8]

I was about to say the same.

 

1. She moved away from the 5 year EPS targets

2. Reduced the amount of stock being repurchased

3. Focusing on growth initiatives (security, cloud, analytics, Watson etc)

5. Provided a revenue target of growth initiatives

6. Acquiring small growth initiative companies that they can scale

7. Cutting cost

8. Selling non-core businesses

Etc...

 

I can keep on going but Ginni is doing the right moves for the business.

 

What exactly is she doing wrong?

[dwy000]

I was about to say the same.

 

1. She moved away from the 5 year EPS targets

2. Reduced the amount of stock being repurchased

3. Focusing on growth initiatives (security, cloud, analytics, Watson etc)

5. Provided a revenue target of growth initiatives

6. Acquiring small growth initiative companies that they can scale

7. Cutting cost

8. Selling non-core businesses

Etc...

 

I can keep on going but Ginni is doing the right moves for the business.

 

What exactly is she doing wrong?

It's also what she HASN'T done.  Which is succumb to the "revenue growth over profits" pressure and made a large acquisition to drive top line at the cost of cash flow and margins.

[Palantir]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

[dwy000]

I think this "not chasing after revenue growth" is a straw man. I think most critics of IBM, including myself get that IBM is trying to become smaller and shed business units, which will hurt revenue growth. The main reason people don't like IBM is because they don't feel it will be technologically and commercially relevant in the future, not because of the lack of revenue growth. If this line of reasoning is correct, repurchasing shares is not going to solve the problem.

 

Anyways, what is the target return that longs have here?

 

I can't speak for anyone else, but I'm not looking at this for massive upside or a quick double.  At 10% FCF yield I see it as a nice 10% earner with limited downside over the long term and good upside if they can stabilize the core and return to even single digit growth down the road. 

 

It returns pretty much all excess cash each year providing support for the downside and I don't have to worry too much about a Valeant like event cutting it in half. 

[Dalal.Holdings]

It's also what she HASN'T done.  Which is succumb to the "revenue growth over profits" pressure and made a large acquisition to drive top line at the cost of cash flow and margins.

 

We agree. We believe that Gini lacks fatal aspects of (usually male) CEO Ego which often leads to pursuit of overpriced acquisitions and growth without real returns. Many investors seem to enjoy watching management splurge in such ways at other tech firms.

 

The tech world is littered with firms that hoard cash and make expensive acquisitions. For now, investors reward those firms with high multiples. For now...

[KCLarkin]

Is it the case that those businesses aren't growing as fast as expected, or is it that the others are declining faster than expected?  I would think the answer to that is important.

 

Main issues in Q3 appear to be:

BRIC  -7%

GBS (e.g. SAP implementations) - 5%

Software -3%

 

The growth initiatives were up 27% at constant currency, so the problem is really in the core. Software is the real killer, since it has the highest margins.

[rpadebet]

I am struggling to figure out Buffett's angle on this one.

 

If not for his investment and frankly the size of the bet, I would not give IBM much thought at all.

I very strongly believe that in the tech space if you don't innovate, move first or invest a ton of money in the next generation products, you are basically done as a company. IBM didn't do any of this and the stupidest thing they have done in my opinion is take on debt + fcf and repurchase shares with it. They did it to reach those insane eps targets for Wall Street crowd.

 

I think Druckenmiller is exactly right. These guys care a lot about their reported performance. This ensures mediocrity in Tech and mediocrity essentially means you are dead sooner or later.

 

To the argument that they are tightly integrated into government, finance, security etc...I heard this one before, I even believed it - the company was BBRY.

 

I believe WEB is a genius in investing, so no, unlike others I don't think he has lost his marbles on this one. He definitely has an angle. For the life of me I can't figure out what it is. Until now, after his BNSF purchase, I thought he was into investing in businesses which can not only generate lots of fcf, but also have the ability and runway to reinvest that in themselves.

 

Here I can't figure it out. There is cash flow, but it will die soon if not reinvested into something better. They had an opportunity 5 years ago to do so in cloud, they didn't and ceded the market to AWS, MSFT, GOOG et al. Just look at the competition, they all have their own cash flow moat machines and they are investing heavily. Except for MSFT( whose ATM, Windows is a mature product), GOOG ( search) & AMZN ( Ecommerce) are fast growing ATM's.

 

IBM has a declining ATM and they pissed away the cash and even took on debt to meet eps targets. I thought WEB didn't like the short term game...

 

Can anyone help me figure this out? WEB is betting here, at this stage in his career, because he sees something of true enduring value. What could that be?