IBM - International Business Machines

[ccplz]

"Never, ever invest in the present. It doesn’t matter what a company is earning, what they have earned. You have to visualize the situation 18 months from now, and whatever that is, that’s where the stock will be, not where it is today. And too many people tend to look at the present, oh this is a great company, they’ve done this or this central bank is doing all the right things. But you have to look to the future. If you invest in the present, you’re going to be run over. "

 

Good advice no argument here.  But not the point of my article.  My purpose was to take something Buffett said in an interview and put some numbers to it in order to understand how he thinks.  Throughout his shareholder letters Buffett states the importance of returns on tangible capital, both on an annual basis and a 5-year rolling basis for retained earnings.

 

What are you talking about?

 

Your article was almost entirely about the past.

[scorpioncapital]

Perhaps tangible capital employed is a little like intrinsic value. You can't be precise but you can try to estimate it. Here's a start, invert the question - what are the *intangible* elements of a business? If those appear to be far greater than the factories and plants, you might just say intangible capital employed is xN times tangible capital within some range of error. If it's like 100 to 1 or 50 to 1 the order of magnitude is the same. Sounds like the worry is if you think it's 10 and it's 1000. Not sure if there are such extreme cases. I would put R&D somewhere in the middle. There are people, which are tangible employees but the ideas in their heads who can say the value of that? Perhaps something like productivity or sales per employee?

[TheAiGuy]

Perhaps tangible capital employed is a little like intrinsic value. You can't be precise but you can try to estimate it. Here's a start, invert the question - what are the *intangible* elements of a business? If those appear to be far greater than the factories and plants, you might just say intangible capital employed is xN times tangible capital within some range of error. If it's like 100 to 1 or 50 to 1 the order of magnitude is the same. Sounds like the worry is if you think it's 10 and it's 1000. Not sure if there are such extreme cases. I would put R&D somewhere in the middle. There are people, which are tangible employees but the ideas in their heads who can say the value of that? Perhaps something like productivity or sales per employee?

 

I think of R&D in the same vain as capex -- and IBM spends more on R&D than capex because it is an IP company. I also believe the accumulated R&D spend is valuable and can be valued as an asset. My estimate of that value is $15 billion, which I got to by capitalizing the R&D with the same depreciation schedule as capex. That estimate is wrong, of course, but I don't think it's horrible. It probably underestimates the replacement cost and overestimates its value to an acquirer (for the same reason -- most R&D isn't monatizable).

 

Even though the IP from the R&D isn't tangible, they had to spend money to create it, which I would consider "employing tangible capital".  It's also a recurring investment need, like M&A, to prevent the business from eroding (for IBM, not generally)

 

To step back for a second, IBM's return on capital doesn't really matter. It's spitting of all this cash to the point where the net cash returned to investors is far greater than the equity in the business. It can't invest all that cash its generating back into the business at historical rates of return.

[scorpioncapital]

I agree in tech part of R&D is most definitely maintenance cap-ex for the future.

IBM is a golden cow, let's hope the cow doesn't die or slowly decline, or if it does slowly decline, we can get out much more than was put in. Still, most investors will agree a company with a bright future is preferable to one that is running off, even if you can make a profit eventually. I don't think IBM is quite in the dead category but even if it was that is a margin of safety. Not many people discuss it but margin of safety does not offset opportunity cost. It's better to have a thriving opportunity than have to fall back on a margin of safety. But as far as fall-backs go, better to have one that not. The key is to determine if the balance between big reward, small reward, and no reward is a good mix.

[fareastwarriors]

Artificial intelligence: Can Watson save IBM?

 

http://www.ft.com/intl/cms/s/2/dced8150-b300-11e5-8358-9a82b43f6b2f.html

 

 

IBM bets on mergers and algorithms for growth

 

http://www.ft.com/intl/cms/s/0/11010eea-ae5f-11e5-993b-c425a3d2b65a.html#axzz3x42NUwkO

[fareastwarriors]

thoughts on 4Q?

 

 

 

http://www-03.ibm.com/press/us/en/pressrelease/48846.wss

 

 

Fourth-Quarter 2015:

 

o  Diluted EPS from continuing operations:

 

    - Operating (non-GAAP): $4.84, down 17 percent; impact of 20 points from prior year System x divestiture gain;

 

    - GAAP: $4.59, down 17 percent;

 

o  Net income from continuing operations:

 

    - Operating (non-GAAP): $4.7 billion, down 19 percent; impact of 19 points from  prior year System x divestiture gain;

 

    - GAAP: $4.5 billion, down 19 percent;

 

o  Revenue from continuing operations: $22.1 billion:

 

    - Down 2 percent adjusting for currency; down 9 percent as reported;

 

o  Services backlog of $121 billion, up 1 percent adjusting for currency.

 

 

 

Full-Year 2015:

 

o  Diluted EPS from continuing operations:

 

    - Operating (non-GAAP): $14.92, down 10 percent; impact of 7 points from prior year System x and customer care divestiture gains;

 

    - GAAP: $13.60, down 13 percent;

 

o  Net income from continuing operations:

 

    - Operating (non-GAAP): $14.7 billion, down 12 percent; impact of 7 points from prior year System x and customer care divestiture gains;

 

    - GAAP: $13.4 billion, down 15 percent;

 

o  Gross profit margin from continuing operations:

 

    - Operating (non-GAAP): 50.8 percent, up 20 basis points; 

 

    - GAAP: 49.8 percent, down 20 basis points;

 

o  Revenue from continuing operations: $81.7 billion:

 

    - Down 1 percent adjusting for currency (8 points or more than $7 billion) and divestitures (3 points or nearly $3 billion); down 12 percent as reported;

 

o  Strategic imperatives revenue of $28.9 billion now represents 35 percent of total IBM revenue, up 26 percent adjusting for currency and the System x divestiture; up 17 percent as reported:

 

    - Total Cloud revenue of $10.2 billion up 57 percent adjusting for currency and the System x divestiture, up 43 percent as reported;

 

      -- Cloud delivered as a service revenues of $4.5 billion, up 61 percent adjusting for currency, up 50 percent as reported;

 

      -- Annual run rate of $5.3 billion vs. $3.5 billion in the fourth quarter 2014 for cloud delivered as a service;

 

    - Business analytics revenue up 16 percent adjusting for currency, up 7 percent as reported to $17.9 billion;

 

    - Mobile revenue more than tripled;

 

    - Security revenue up 12 percent adjusting for currency, up 5 percent as reported;

 

o  Free cash flow of $13.1 billion, up $0.7 billion;

 

    - Free cash flow realization equaled 98 percent of GAAP net income from continuing operations;

 

o  Total capital return to shareholders of $9.5 billion; dividends of $4.9 billion and gross share repurchases of $4.6 billion;

 

[Guest Grey512]

I went short last week. Glad I did. Yes the SI division is growing, but it will not grow fast enough to replace the other $40b+ of revenue that is declining by over 12% p.a. Then there are the dumb capital allocation decisions. They bought back billions of stock, and for what? EPS is still down and continues to go down. With regards to cloud / SoftLayer, I expect that the market will consolidate to maybe 3 branded platforms and that's AWS, Azure and maybe Google Cloud. The world will not need SoftLayer.

 

Anything at a price. A fair risk-reward here would be at about 8x cash flows and that to me implies a share price below $100.

 

[TheAiGuy]

I went short last week. Glad I did. Yes the SI division is growing, but it will not grow fast enough to replace the other $40b+ of revenue that is declining by over 12% p.a. Then there are the dumb capital allocation decisions. They bought back billions of stock, and for what? EPS is still down and continues to go down. With regards to cloud / SoftLayer, I expect that the market will consolidate to maybe 3 branded platforms and that's AWS, Azure and maybe Google Cloud. The world will not need SoftLayer.

 

Anything at a price. A fair risk-reward here would be at about 8x cash flows and that to me implies a share price below $100.

 

 

Agree. I sold out this morning (after having bought in the mid 130s). Someone pointed out on twitter that capex was essentially flat yoy. If IBM is trying to compete in cloud, that's terrible.

[Picasso]

IBM finally below the price I said I would buy but so many cheaper situations out there now.

 

My question is, do you give a trough valuation to what will like be trough earnings?  i.e. 10x $10 EPS. I don't think even IBM deserves trough multiples but one could make that case.

[Guest Grey512]

Another thing: IBM, the brand. I've thought about this a little bit. IBM is one of the most valuable brands in the world today if you read business magazine rankings that come out every once in a while. People know the letters 'IBM', people recognize its logo. We all know the saying "No one ever got fired for buying IBM". That is one of the things that intrigues me about IBM and led me to originally consider it as a long.

 

But the thing is, the people for whom the brand 'IBM' was a big thing will almost all die off by 2045. There are no reasons why the brand won't go the way of Xerox.

[TheAiGuy]

IBM finally below the price I said I would buy but so many cheaper situations out there now.

 

My question is, do you give a trough valuation to what will like be trough earnings?  i.e. 10x $10 EPS. I don't think even IBM deserves trough multiples but one could make that case.

 

Dunno -- but I know I'm not confident enough in the thesis to hold, so I'm walking away

[bookie71]

Another thing: IBM, the brand. I've thought about this a little bit. IBM is one of the most valuable brands in the world today if you read business magazine rankings that come out every once in a while. People know the letters 'IBM', people recognize its logo. We all know the saying "No one ever got fired for buying IBM". That is one of the things that intrigues me about IBM and led me to originally consider it as a long.

 

But the thing is, the people for whom the brand 'IBM' was a big thing will almost all die off by 2045. There are no reasons why the brand won't go the way of Xerox.

BUT you won't lose your job if you recommend IBM and they fail, BUT you might if you recommend "xyz" company and they fail.

[TheAiGuy]

Another thing: IBM, the brand. I've thought about this a little bit. IBM is one of the most valuable brands in the world today if you read business magazine rankings that come out every once in a while. People know the letters 'IBM', people recognize its logo. We all know the saying "No one ever got fired for buying IBM". That is one of the things that intrigues me about IBM and led me to originally consider it as a long.

 

But the thing is, the people for whom the brand 'IBM' was a big thing will almost all die off by 2045. There are no reasons why the brand won't go the way of Xerox.

BUT you won't lose your job if you recommend IBM and they fail, BUT you might if you recommend "xyz" company and they fail.

 

If you recommend IBM over AWS, you might.

[Ulrich]

If you recommend IBM over AWS, you might.

 

Talanx (Mother of Hannover Re) Insurance (Number 3 after Allianz and Munich Re in Germany) were known for their old IT. They had still old Siemens Systems at work. In December there were news in the newspaper that Talanx signed a 7 year contract with IBM to handle their IT.

 

So i really think the only person with real competence of telling how sticky their business is is really someone who has inside knowledge of an IT Departement of a big bank or insurance company.

 

Because somehow the CIO of Talanx thinks that IBM is still the best for this job and somehow Warren thinks too.

 

---

In the cloud topic the interesting question for me is: "How much of the profits in cloud will IBM get" and not? "Is IBM gowing as fast as the overall cloud market?".

 

If "i" as a private person upload my holiday pictures in the cloud i will always go with the lowest price offer. Because it is not really critical for me if someone other sees my holiday pictures or if the uptime is really 24/7.

 

So of course the growth of overall cloud is maybe faster than IBMs cloud growth. But the interesting thing is "which cloud is chosen by the big institutions in finance and insurance(where the big bucks can be made)".

 

 

[TheAiGuy]

If you recommend IBM over AWS, you might.

 

Talanx (Mother of Hannover Re) Insurance (Number 3 after Allianz and Munich Re in Germany) were known for their old IT. They had still old Siemens Systems at work. In December there were news in the newspaper that Talanx signed a 7 year contract with IBM to handle their IT.

 

So i really think the only person with real competence of telling how sticky their business is is really someone who has inside knowledge of an IT Departement of a big bank or insurance company.

 

Because somehow the CIO of Talanx thinks that IBM is still the best for this job and somehow Warren thinks too.

 

---

In the cloud topic the interesting question for me is: "How much of the profits in cloud will IBM get and not is IBM gowing as fast as the overall cloud market".

 

If "i" as a private person upload my holiday pictures in the cloud i will always go with the lowest price offer. Because it is not really critical for me if someone other sees my holiday pictures or if the uptime is really 24/7.

 

So of course the growth of overall cloud is maybe faster than IBMs cloud growth. But the interesting thing is "which cloud is chosen by the big institutions in finance and insurance(where the big bucks can be made)".

 

I'm not saying IBM's business isn't sticky or that a lot of companies will (continue to) choose them as a vendor -- I said their reputation isn't what it once was, and that the aphorism "Nobody ever got fired for hiring IBM" was about their system 360 servers -- so, decades ago.

[Guest Grey512]

AWS is skewed to the public cloud. IBM is skewed towards customers (i.e. CIOs) who wish for greater control. Check out the IBM Softlayer blog FAQ section.

 

Two immediate observations to your anecdote:

- Germans are well known for being suspicious of clouds and leaning towards greater control over their infrastructure.

- Financial institutions are also well known for being reticent to make full moves to public clouds.

 

What is Talanx? A (*drum roll*) German (*another drum roll*) Financial Institution.

 

So I don't think you picked a particularly strong anecdote in IBM's favor.

[Ulrich]

is your point that public cloud will be the higher margin business or just better business or that hybrid cloud will be too small to scale and make money?

 

 

 

 

[TheAiGuy]

is your point that public cloud will be the higher margin business or just better business or that hybrid cloud will be too small to scale and make money?

 

I don't know. My point is that I'm unconvinced that IBM is competing effectively. I think they'll probably be fine over time, cloud and analytics look like a good opportunity (IOT looks like BS to me, fwiw) but that's low confidence.

[rpadebet]

To me it is starting to get interesting at these levels especially compared to MSFT valuation, their main competitor in the enterprise cloud space. I still don't see how IBM beats MSFT, but they are probably good enough to end up with a decent market share in this space.

 

It is good to see the margins hold up even with declining revenues. Strategic imperatives seems to have become a decent chunk of the business. It seems to me from here if growth rates in cloud can be maintained and the decline rates in the legacy business can be managed around these levels, then total revenue can start picking up 2016 onwards. If total revenues only grow modestly from here, at roughly 20% operating margins, this business should be worth at least 2x sales or about $160 a share.

 

Decent margin of safety being built in at this price. I would of course love it at around $100, but I need to dig into this a bit more before pulling the trigger.

[Palantir]

How does Ginny still have a job?

[jason]

How does Ginny still have a job?

 

I agree fully.  Look at most of the other tech companies: Microsoft, Cisco, Apple, Google.  All have made changes in the top and are much better foundation wise for it.

 

Is there anyone out there that thinks Ginny is even remotely on the same level as a Satya who apparently is adored by microsoft from the mess that Ballmer created?

 

Buffett should push for a change at the top like he did with Coke.  The whole we are transitioning excuse is getting old very fast.

 

I love the company and love most of the thesis but right now i cant get past the 2nd filter regarding faith in management.

[Phaceliacapital]

Did anyone get a better understanding of the huge improvement in their Q4 tax rate which without they would not have been able to beat EPS consensus?

 

To be fair, Ginny received quite the work when she got there.

[loganc]

Did anyone get a better understanding of the huge improvement in their Q4 tax rate which without they would not have been able to beat EPS consensus?

 

To be fair, Ginny received quite the work when she got there.

 

Perhaps, rather than shit on Rometty, we should all provide a nice "slow clap" for Sam Palmisano for the timing of his exit. 

[ourkid8]

Ginny was dealt a poor hand when she started as she was being measured by EPS targets from prior management. Since abandoning the targets, she has increased M&A spend in the strategic focus areas of the business.  This increased M&A spend, will add significantly value and speed up the strategic transition. We should start to see the uplift in 2017 when strategic revenue starts to outpace the legacy business. 

[fareastwarriors]

IBM Said to Pay $130 Million to Acquire Video Startup Ustream

 

http://www.bloomberg.com/news/articles/2016-01-21/ibm-said-to-pay-130-million-to-acquire-video-startup-ustream