IBM - International Business Machines

[karthikpm]

For what it's worth;

 

Martin Shkreli's (yep, him) - IBM model valuation.

 

https://www.youtube.com/watch?v=TRXqVOrdsz0

 

(some interesting Excel abilities.)

 

2 Hrs, seriously  ? Anyone have the cliff notes version ?  :P

[adesigar]

For what it's worth;

 

Martin Shkreli's (yep, him) - IBM model valuation.

 

https://www.youtube.com/watch?v=TRXqVOrdsz0

 

(some interesting Excel abilities.)

 

2 Hrs, seriously  ? Anyone have the cliff notes version ?  :P

 

I watched a bit of it and got bored so I skipped forward to a few random spots.

 

At the 1hr 32 min mark he wants to look for IBM competitors in Consulting and searches for TATA in the Bloomberg terminal. HE is probably looking for TCS (Tata Consultancy Services). He selects TATA STEEL (I'm not kidding) makes some observations and then moves onto Cognizant. And that's when I stopped.

[adesigar]

Here

[ccplz]

So Martin Shkreli plays League of Legends.

[TheAiGuy]

So Martin Shkreli plays League of Legends.

 

Good post.

[Jurgis]

So Martin Shkreli plays League of Legends.

 

Good post.

 

All I know about investing I learned from LoL.

Who needs Bloomberg terminal.

[Ballinvarosig Investors]

I don't know anything about clouds or mainframes, but I have had a look at the latest numbers from IBM and continue to be mystified. Revenue continues to go down, margins are down, cashflows are down. Meanwhile, the balance sheet continues to weaken (intangible assets continue to rise, debt continues to rise). At this stage, the balance sheet isn't into danger territory, but at some point, the company just will not be able to support the continued issuance of debt to support the share buybacks and dividends, especially as the core business continues to deteriorate.

 

I don't understand why Warren is invested in this. The egregious use of non-GAAP accounting, selective disclosure, and all the other financial engineering is something that Warren has written extensively against in the past, but yet he continues to build a position. I wonder has Warren lost perspective on his original investment thesis in all this? When you look at the 2011 annual report for IBM and compare it to the last 5 years, you can see why he got involved. IBM looks a great company that's growing at a reasonable rate. However, we then saw the company peak in about 2012/2013, before entering into a decline that shows no signs of slowing. I don't think anyone can disagree that the IBM of 2016 is substantially weaker than the IBM of 2012.

[KCLarkin]

cashflows are down

 

Free cash flow increased from $1081 to $2295.

 

I don't understand why Warren is invested in this.

 

Buffett first invested in 2011. So he made investment based on 2010 annual results. Between 2010 and 2015:

Revenue per share increased from $81.33 to 84.64

"Cash flow" per share increased from $16.01 to $17.83

EPS increased from $11.52 to $13.60

Dividend increased from $2.50 to $5.00

 

From 2012/2013, things look worse. But you also need to factor in currency volatility, emerging markets cycle, and hardware cycles.

 

Meanwhile, the balance sheet continues to weaken (intangible assets continue to rise, debt continues to rise)

 

Net debt, excluding the financing business, is only $3.9B. Compared to $14B per year in FCF.

 

the company just will not be able to support the continued issuance of debt to support the share buybacks and dividends

 

2015:

FCF = $13.1B

Div + Buyback = $9.5B

Payout ratio = 73%

 

The idea that IBM is borrowing to repurchase shares is a myth.

 

The egregious use of non-GAAP accounting, selective disclosure, and all the other financial engineering is something that Warren has written extensively against in the past

 

If you read Buffett's annual letter, you'll see that he is a big fan of non-GAAP accounting. See page 15 of the 2015 annual letter for example.

 

But even if you are a GAAP purist, it is hard to call IBM egregious. 2015 non-GAAP Income was only 104% of GAAP income.

 

Compare this with IBM's tech peers:

Oracle 127%

Cisco 127%

Salesforce: GAAP=negative $47M, non-GAAP=$506M

Coke: 120%

 

IBM's non-GAAP income includes SBC and restructuring charges. This is pretty rare. And these are probably the two items most abused in non-GAAP reports.

 

I don't think anyone can disagree that the IBM of 2016 is substantially weaker than the IBM of 2012.

 

That's a safe bet. But this is also priced in. At the end of 2012, you were paying 12.6x trailing earnings. At the end of 2015, you were paying 9.2x.

 

entering into a decline that shows no signs of slowing.

 

Q1 2016 looks pretty good. Software decline decelerated. US dollar weakened. FCF improved. Asia Pacific returned to revenue growth.

 

 

[Ballinvarosig Investors]

Free cash flow increased from $1081 to $2295.

Free cash flow may have been beaten in this one instance, but the overall trend is that it's decreasing. FCF was $15.75bn for 2011, it is expected to be between $11-12bn for 2016. I have no doubt that the bean pushers will be able to hit the higher end of the estimate as they usually do. Nevertheless, the march downward continues with no signs of abatement. Buying back stock in this environment suggests to me that they are more interested in chasing their own tail than stabilizing the business. In fairness, I am not convinced that their acquisition strategy would be any better use of capital. 

Buffett first invested in 2011. So he made investment based on 2010 annual results. Between 2010 and 2015:

Revenue per share increased from $81.33 to 84.64

"Cash flow" per share increased from $16.01 to $17.83

EPS increased from $11.52 to $13.60

Dividend increased from $2.50 to $5.00

 

From 2012/2013, things look worse. But you also need to factor in currency volatility, emerging markets cycle, and hardware cycles.

Again, examining IBM on a per share basis hides the underlying weakness of the business. It just seems very un-Buffett like to invest in something that looks to be in slow structural decline.

Net debt, excluding the financing business, is only $3.9B. Compared to $14B per year in FCF.

The balance sheet does concern me, even if the net debt headline figure you quote looks ok. The global financing part, I don't fully understand. But just looking at the headline numbers over the last 5 years, net tangible assets are in decline, debt is up, intangible assets are up. Again, the situation isn't critical by any means, but the slow deterioration may leave IBM exposed over the long-term.

But even if you are a GAAP purist, it is hard to call IBM egregious. 2015 non-GAAP Income was only 104% of GAAP income.

 

Compare this with IBM's tech peers:

Oracle 127%

Cisco 127%

Salesforce: GAAP=negative $47M, non-GAAP=$506M

Coke: 120%

I am not fan of those companies either. Every quarter IBM set themselves modest targets, and they always achieve them. Every time investors seem to fall for the same bullsh1t.

 

Do people not remember their 2015 roadmap? When you measure IBM's performance over the longer-term, the truth isn't so easy to obfuscate.

 

https://www.ibm.com/investor/events/jpmorgan0510/presentation/slide.pdf

[NBL0303]

 

The egregious use of non-GAAP accounting, selective disclosure, and all the other financial engineering is something that Warren has written extensively against in the past

 

If you read Buffett's annual letter, you'll see that he is a big fan of non-GAAP accounting. See page 15 of the 2015 annual letter for example.

 

But even if you are a GAAP purist, it is hard to call IBM egregious. 2015 non-GAAP Income was only 104% of GAAP income.

 

 

Excellent point KCLarkin.  Buffett, and most value investors, are big fans of non-GAAP accounting when it enriches clarity and further illuminates and abhor non-GAAP accounting when used to obfuscate or even to merely appease.  Indeed, almost every good, value-oriented CEO will at one point or another find that using non-GAAP figures are much more illuminating and when that is the case, the appropriate response is to present both sets of figures and clearly explain the difference.  IBM seems to be to be doing that and it seems a good use of non-GAAP to me but, in any event, as KC said, even if IBM's non-GAAP usage is not quite exemplar, if you think they are egregious, I would like to show hundreds of others that I have come across just this year that will make your head explode.

[KCLarkin]

http://www.bloombergview.com/articles/2016-04-19/ibm-is-not-a-growth-company

 

[stahleyp]

A "great" investor gives his take...yes, I'm using that very loosely.

 

https://www.yahoo.com/finance/video/whitney-tilson-ibm-value-trap-191800222.html

[KCLarkin]

A "great" investor gives his take...yes, I'm using that very loosely.

 

https://www.yahoo.com/finance/video/whitney-tilson-ibm-value-trap-191800222.html

 

The interesting thing about Buffett's mistakes, assuming IBM is a mistake, is that they are good mistakes. IBM is down less than 10% since Buffett started purchasing. Add in dividends and he is close to even.

 

Compare that to Hertz, one of Tilson's picks, that is down 60%. Or Ackman's pharma pick. Or Pabrai's commodity pick. Or Icahn's energy picks. Or Watsa's Greek bank.

[TheAiGuy]

A "great" investor gives his take...yes, I'm using that very loosely.

 

https://www.yahoo.com/finance/video/whitney-tilson-ibm-value-trap-191800222.html

 

The interesting thing about Buffett's mistakes, assuming IBM is a mistake, is that they are good mistakes. IBM is down less than 10% since Buffett started purchasing. Add in dividends and he is close to even.

 

Compare that to Hertz, one of Tilson's picks, that is down 60%. Or Ackman's pharma pick. Or Pabrai's commodity pick. Or Icahn's energy picks. Or Watsa's Greek bank.

 

what were the rules? I think I remember something like:

 

1) Don't lose money

2) Don't lose money

[rb]

what were the rules? I think I remember something like:

 

1) Don't lose money

2) Don't lose money

3) You don't talk about fight club :)

[Parsad]

A "great" investor gives his take...yes, I'm using that very loosely.

 

https://www.yahoo.com/finance/video/whitney-tilson-ibm-value-trap-191800222.html

 

The interesting thing about Buffett's mistakes, assuming IBM is a mistake, is that they are good mistakes. IBM is down less than 10% since Buffett started purchasing. Add in dividends and he is close to even.

 

Compare that to Hertz, one of Tilson's picks, that is down 60%. Or Ackman's pharma pick. Or Pabrai's commodity pick. Or Icahn's energy picks. Or Watsa's Greek bank.

 

That's too simplistic an analysis.  I bought IBM well after Buffett at $120 a share...ergo, now I am smarter and better than Buffett? 

 

What if Salomons had gone the other way?  We might not even be talking about Berkshire today.  The question is, did Buffett get better after Salomons?  And in that respect, he's ahead of the rest of the pack because he did.

 

http://fortune.com/1997/10/27/warren-buffett-salomon/

 

Buffett had long told his three children that it takes a lifetime to build a reputation but only five minutes to tear it down.  As he moved along through Sunday, he told himself he might be edging up on the five minutes.

 

Cheers!

[KCLarkin]

That's too simplistic an analysis. 

 

Not really analysis at all. Just a comment on different investment styles. I just think Buffett's value traps (WMT, IBM, AXP) are less risky than Tilson's (MU, airlines, SODA).

[doughishere]

A "great" investor gives his take...yes, I'm using that very loosely.

 

https://www.yahoo.com/finance/video/whitney-tilson-ibm-value-trap-191800222.html

 

The interesting thing about Buffett's mistakes, assuming IBM is a mistake, is that they are good mistakes. IBM is down less than 10% since Buffett started purchasing. Add in dividends and he is close to even.

 

Compare that to Hertz, one of Tilson's picks, that is down 60%. Or Ackman's pharma pick. Or Pabrai's commodity pick. Or Icahn's energy picks. Or Watsa's Greek bank.

 

 

+1. But at least they are out there. I don't get the distaste that some people have others failures though. Everyone fails ins some way so it makes sense that these guys are no different. Like Auckland or Buffett or Tilson is supposed to bat 1000.

 

 

Shit I've lost money in this business....you'd be surprised how much you lay out money in any business only to have some failure. It's like Failure is some secret. More people should fail.

 

I was listening to Charlie rose and Bryan Cranson was talking about him meeting warren and Cranson asked "what do you do? How are you so successful?" Buffets reply: I try to make more good choices than bad. That's the secret"

 

 

It's my estimation that people are afraid of failure and that's what keeps them back....then they sit back and say others are just "lucky."

 

So you learn and readjust. That's what most people don't do. Learn and re adjust.. They just do the same mistake over and over again.....to me. OR Hey would rather make no choice than fail and learn.

 

 

These guys pull rabbits out of their hats continually and we just bitch about their failures....I don't get it.

 

 

 

 

 

[doughishere]

The other sad thing about this is that suddenly a few quarters of declining [insert metric here] automatically means failure...most of y'all think the story is over when it probably takes at least 5 years to kill a business like IBM....I don't think the lotus hasn't quite unfolded yet. Seems like an oppertunity to at the minimum to look into the potential new "investment", I like to call it capitalizing of of others poor decisions.

 

 

 

And most of you are so proud about being long term shareholders.

[Parsad]

These guys pull rabbits out of their hats continually and we just bitch about their failures....I don't get it.

 

+1!

 

The other issue is that they are being compared to the "greatest investor of all-time!"  Not each other, not against their respective indices, but against Buffett!

 

Sidney Crosby is arguably the greatest hockey player of his generation, but he's not going to come anywhere near Wayne Gretzky's points or scoring numbers.  Does that make Crosby a failure, or that Crosby simply doesn't have the same skill-set as Gretzky?

 

Cheers!

[KCLarkin]

The other issue is that they are being compared to the "greatest investor of all-time!"  Not each other, not against their respective indices, but against Buffett!

 

This has really went off the rails. I wasn't criticizing the famous investors listed, I was defending Buffett and his IBM pick. There are certain qualities that IBM had that prevented a real blowup.

 

I will refrain from further comment.

[indirect]

CM has said multiple times.

 

IBM is VC in a steady state business. Mainframe and services are stable , cloud and expert systems (AI) are VC . WB has seen all sides of IBM within the BRK companies and is comfortable with the risk. CM ? by body language.

 

My 2c, it is more risky than other WB investments.

No investments in IBM yet.

[Parsad]

The other issue is that they are being compared to the "greatest investor of all-time!"  Not each other, not against their respective indices, but against Buffett!

 

This has really went off the rails. I wasn't criticizing the famous investors listed, I was defending Buffett and his IBM pick. There are certain qualities that IBM had that prevented a real blowup.

 

I will refrain from further comment.

 

Hi KC,

 

I wasn't referring specifically to you or anyone else, so please don't take it personally.  It just seems as though every time there is a blowup by a manager, their entire career's work becomes negligible relative to that blowup. 

 

You are correct...they have had significant losses in ideas, and Buffett has never lost more than 1% of capital at Berkshire according to Munger...but he's arguably a six-sigma event relative to his peers.       

 

In this business, you are only as good as your last year or last month...the "long-term" investor is no better at viewing the long-term as the average investor.  Thus it's a bit frustrating to see good managers get lumped in as mediocre in discussions.  Cheers!

[CorpRaider]

Tilson is an unqualified douche.  If you call one of Buffett's big investments a "value trap" with such high conviction and so publicly, without prefacing your opinion by acknowledging he can buy you 100 times over, you are behaving as a douche and people are going to mock you as such. 

[shalab]

With the treasury yield at all time lows, I think IBM provides a good income source. Also the reduction in the number of shares will eventually put this baby above 200 even if income doesnt grow much.

 

IBM - number of shares owned:

 

81,232,303

 

Dividend per share:

 

$5.60

 

Income per year:

 

455 million