frommi Posted October 21, 2014 Share Posted October 21, 2014 What both the management and the market miss is the profile of CF when you need to invest to create new platforms. In their case, cloud. The CF will look like a hi-tech startup. Positive CF will be years away in the future. But this is a commodity business where IBM has no advantage at all and is competing with the mother-of-all-business-destroyers. Under these assumptions i would never put money into IBM. :) Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2014 Share Posted October 21, 2014 I was talking about stock picks - not buying the railroad. You'll note also I excluded banks and preferrerd...BAC was both. Anyway - I have a lot of my net worth in BRK and I'm very comfortable with that because these 1-10bn positions are not material to BRK. Just pointing out something I think has been fairly obvious for a while: excluding banks and preferreds Buffett minority stock positions have seriously underperformed the market. The money to be made in BRK is through reinvestment in the railroad and utilities, while growing insurance float moderately. Stock picks less important - I agree. Although Ted and Todd are kicking butt and their portfolios are growing. Link to comment Share on other sites More sharing options...
stahleyp Posted October 21, 2014 Share Posted October 21, 2014 If Buffett was not in IBM, where do you think shares would be trading right now? I assume a "bit" lower than $170. I think most investors today in IBM are only there because of Buffett. This has probably led to a higher valuation than would otherwise be the case. Although 10x earnings is not exactly expensive. This seems to be falling into Buffett's "I'll make more money if the share price falls." We'll see how well that works out. Well, he owns 7% of the outstanding shares so, yeah, I do agree that if he were out of it the shares would be a bit lower. However, who is following him? It looks like the largest institutional shareholders are indexers - Vanguard, State Street and Blackrock. In fact, I only see one actively managed mutual fund that holds a half decent stake - MEIAX (and even that is less than a 2% holding) Do you really think retail investors would be enough to move the needle? Based on what I see I disagree that "most investors in IBM are only there because of Buffett". I see no reason to think that. I think my point is, would we be talking about IBM if Buffett was not involved? A lot of us are looking at it thinking "wow Buffett must see something everyone else is missing." I think this thought is pervasive and has some effect on the price people are willing to pay for the stock. I definitely agree that both the market as a whole and the average board member is valuing IBM higher than if WB had never invested. If WB had never invested, I wouldn't have spent nearly as much time as I have researching IBM; I probably would have stopped after the first 10k. I was even considering a small investment (my first hint this was a bad idea) as recently as last week. I definitely think WB has failed when he strays away from his principles. COP was bad luck but TSCO, IBM, and KFT. I'm not sure why JNJ is a failure? Did he just not make much? He has beaten the market considerably over any business cycle and his actions still seem reasonable to me so I wouldn't come close to writing him off, I just don't pay much attention to his investments that don't have wonderful business models (although this leaves a lot of risk itself). I agree that most of us are talking about IBM because Buffett is involved. However, I do doubt the price would be dramatically lower if he weren't in it (discounting his controlled shares). Of course it would be somewhat different since he owns so much of the shares outstanding. And I do think that there are some people in it due to Buffett's influence but I doubt it's influencing the price that much. I see no evidence to support that view (ie institutions loading up, just because Buffett is). Link to comment Share on other sites More sharing options...
Palantir Posted October 21, 2014 Share Posted October 21, 2014 I think you both have good points. There'd be a lot less interest in IBM without WEB's endorsement...however, I don't think IBM's investor base is really following WEB per se. Link to comment Share on other sites More sharing options...
LowIQinvestor Posted October 21, 2014 Share Posted October 21, 2014 Wow, this is getting very interesting. I'm buying some calls...this is way overblown. Link to comment Share on other sites More sharing options...
A_Hamilton Posted October 21, 2014 Share Posted October 21, 2014 Wow, this is getting very interesting. I'm buying some calls...this is way overblown. You've got a company with $12-$13 billion FCF and a market cap of $163 billion. The company is shrinking and over levered. Why is this overblown? Link to comment Share on other sites More sharing options...
Picasso Posted October 21, 2014 Share Posted October 21, 2014 Has anyone done any work on the IBM valuation? I am showing about $12 billion of FCF, adjusted for acquistions to keep revenue close to flat around $9-10 billion and falling. This is a 5-6% FCF yield based on the current stock price which does not sound that compelling? Unless you think the numbers will start to look a lot better this seems fair to overvalued. I feel like a lot of investors are seeing the low PE multiple, see Buffett involved and think 1) Buffett doesn't do tech stocks so IBM must be exceptional if he purchased such a large amount of stock 2) Buffett must have consulted with Gates about IBM 3) PE under 10 with interest rates at 2%, wow! I am only now scruitinizing IBM so I am late to the party but I would get more interested around $125 which would be closer to a 7.5% FCF yield. Link to comment Share on other sites More sharing options...
A_Hamilton Posted October 21, 2014 Share Posted October 21, 2014 Has anyone done any work on the IBM valuation? I am showing about $12 billion of FCF, adjusted for acquistions to keep revenue close to flat around $9-10 billion and falling. This is a 5-6% FCF yield based on the current stock price which does not sound that compelling? Unless you think the numbers will start to look a lot better this seems fair to overvalued. I feel like a lot of investors are seeing the low PE multiple, see Buffett involved and think 1) Buffett doesn't do tech stocks so IBM must be exceptional if he purchased such a large amount of stock 2) Buffett must have consulted with Gates about IBM 3) PE under 10 with interest rates at 2%, wow! I am only now scruitinizing IBM so I am late to the party but I would get more interested around $125 which would be closer to a 7.5% FCF yield. Picasso you've got it right. The situation is pretty bad here. Link to comment Share on other sites More sharing options...
Palantir Posted October 21, 2014 Share Posted October 21, 2014 I don't think the heavy cash flow is really a bullish indicator, their business is going to struggle in the future, but they have a large installed base of users...so cash flow is a given. Where that cash flow is going to go is problem. Link to comment Share on other sites More sharing options...
KCLarkin Posted October 21, 2014 Share Posted October 21, 2014 I am showing about $12 billion of FCF, adjusted for acquistions to keep revenue close to flat around $9-10 billion and falling. This is a 5-6% FCF yield based on the current stock price which does not sound that compelling? Unless you think the numbers will start to look a lot better this seems fair to overvalued. What line items are creating the large delta between Earnings Yield and FCF yield? Link to comment Share on other sites More sharing options...
scorpioncapital Posted October 21, 2014 Share Posted October 21, 2014 If Buffett was not in IBM, where do you think shares would be trading right now? I assume a "bit" lower than $170. I think most investors today in IBM are only there because of Buffett. This has probably led to a higher valuation than would otherwise be the case. Although 10x earnings is not exactly expensive. This seems to be falling into Buffett's "I'll make more money if the share price falls." We'll see how well that works out. Well, he owns 7% of the outstanding shares so, yeah, I do agree that if he were out of it the shares would be a bit lower. However, who is following him? It looks like the largest institutional shareholders are indexers - Vanguard, State Street and Blackrock. In fact, I only see one actively managed mutual fund that holds a half decent stake - MEIAX (and even that is less than a 2% holding) Do you really think retail investors would be enough to move the needle? Based on what I see I disagree that "most investors in IBM are only there because of Buffett". I see no reason to think that. I think my point is, would we be talking about IBM if Buffett was not involved? A lot of us are looking at it thinking "wow Buffett must see something everyone else is missing." I think this thought is pervasive and has some effect on the price people are willing to pay for the stock. Buffett's investment needs are different than ours. In the field of public common stocks for Berkshire he would a) prefer something with some dividend or buybacks b) have a decent return on invested capital (ibm appears to be about 13 fcf into 80b = 16%) c) that is liquid, big and he can leverage up with his insurance float. d) for the purposes of keeping Berkshire's internal return on invested capital about equal at 16%. These criteria may or may not apply to the average investor seeking returns somewhat better than the large, slow moving Berkshire or that have to pay variable - positive interest on margin loans over the long term (although I have to admit current margin prices are low enough to possibly make this look good even for a small investor). Like Graham said in Security Analysis the number one question is not what to buy but what are my investment needs specific to my situation. This is also what every financial advisor starts of with as well. Link to comment Share on other sites More sharing options...
prevalou Posted October 21, 2014 Share Posted October 21, 2014 this stock reminds me General Dynamics in the 1990s: shrinking business with a management focused on higher value and massive shares buyback. And a lot of negativity. Link to comment Share on other sites More sharing options...
vinod1 Posted October 21, 2014 Share Posted October 21, 2014 Has anyone done any work on the IBM valuation? I am showing about $12 billion of FCF, adjusted for acquistions to keep revenue close to flat around $9-10 billion and falling. This is a 5-6% FCF yield based on the current stock price which does not sound that compelling? Unless you think the numbers will start to look a lot better this seems fair to overvalued. I feel like a lot of investors are seeing the low PE multiple, see Buffett involved and think 1) Buffett doesn't do tech stocks so IBM must be exceptional if he purchased such a large amount of stock 2) Buffett must have consulted with Gates about IBM 3) PE under 10 with interest rates at 2%, wow! I am only now scruitinizing IBM so I am late to the party but I would get more interested around $125 which would be closer to a 7.5% FCF yield. I have done some work last year so it is a bit dated. But here it goes. http://vinodp.com/documents/investing/IBM%20Valuation%20-%20Vinod%2010-24-2013.pdf Vinod Link to comment Share on other sites More sharing options...
KCLarkin Posted October 21, 2014 Share Posted October 21, 2014 this stock reminds me General Dynamics in the 1990s: shrinking business with a management focused on higher value and massive shares buyback. And a lot of negativity. Interesting comp. The industry dynamics are very different but the strategy is quite similar. Link to comment Share on other sites More sharing options...
txlaw Posted October 21, 2014 Share Posted October 21, 2014 Rometty interviewed by David Faber on CNBC: http://www.cnbc.com/id/100004032?trknav=dw:topnav:video:ceointerviews:102101948 Go to video starting at 10:05 am on October 20. Link to comment Share on other sites More sharing options...
thefatbaboon Posted October 21, 2014 Share Posted October 21, 2014 Rometty interviewed by David Faber on CNBC: http://www.cnbc.com/id/100004032?trknav=dw:topnav:video:ceointerviews:102101948 Go to video starting at 10:05 am on October 20. "make no mistake" rometty's favorite phrase >:( Link to comment Share on other sites More sharing options...
Eye4Valu Posted October 21, 2014 Share Posted October 21, 2014 It's now well below WEB's cost basis for what it's worth. Link to comment Share on other sites More sharing options...
Fat Pitch Posted October 21, 2014 Share Posted October 21, 2014 Rometty interviewed by David Faber on CNBC: http://www.cnbc.com/id/100004032?trknav=dw:topnav:video:ceointerviews:102101948 Go to video starting at 10:05 am on October 20. Talk about damage control. I’m wondering if the miss is due to a real slow down in global demand or someone is eating their lunch. Link to comment Share on other sites More sharing options...
oddballstocks Posted October 21, 2014 Share Posted October 21, 2014 this stock reminds me General Dynamics in the 1990s: shrinking business with a management focused on higher value and massive shares buyback. And a lot of negativity. Interesting comp. The industry dynamics are very different but the strategy is quite similar. I've worked with both companies professionally. There is a night and day difference between General Dynamics and IBM. The employees at General Dynamics have been smart (some scary smart), motivated, communicated well and seem satisfied with the company. This isn't a pile-on, but I've seen the same thing about IBM'ers that all of the articles write about them. IBM is a huge company, they've harmed the golden goose. But tech is different than retail or a consumer focused industry. I think IBM can come back, but they need to undergo a massive cultural shift. I stand by what I said earlier in the thread, I think they're on the cusp of a giant 'transformational' acquisition. In the NYT today they mentioned something similar proposing that IBM purchase Salesforce or Workday. I can see either scenario. I can see a Salesforce/IBM merger. It would get IBM into smaller companies and it would get Salesforce into larger contracts. Both companies have software that's obtuse and difficult to configure...a match made in heaven. At a high level I think a strong argument could be made for that sort of a tie up. Something like this would also bring the cultural shift that IBM needs. There is a lot of opportunity around selling Workday/Salesforce services just like IBM does currently. I'm thinking out loud, but I can see something like this unfold. The company misses a few more quarters of earnings and has their 'oh crap' moment. They hive off a bunch of divisions and shrink down to something smaller. Then they acquire a company such as Salesforce. Fast forward 5-10 years and the new IBM doesn't look like the current one at all. The merger brings new life into the brand and changes the direction of the company. Link to comment Share on other sites More sharing options...
Palantir Posted October 21, 2014 Share Posted October 21, 2014 ^I agree, I think Salesforce is a great potential acquisition...but I think it has gotten too big, which limits acquirers to a select few, and it's hard to see how it can be a cultural fit. I'm thinking we're going to see a lost decade for IBM coming up. Link to comment Share on other sites More sharing options...
LowIQinvestor Posted October 21, 2014 Share Posted October 21, 2014 For those that think this is overvalued I suggest you look at Accenture as a potential comp. Check out the difference in margins. Why is that? I just made IBM a 10% position. The fear is palatable! Link to comment Share on other sites More sharing options...
dwy000 Posted October 21, 2014 Share Posted October 21, 2014 The margins aren't the issue (although they were this quarter), it's the revenues. Accenture is growing strongly. IBM is shrinking. Link to comment Share on other sites More sharing options...
A_Hamilton Posted October 21, 2014 Share Posted October 21, 2014 For those that think this is overvalued I suggest you look at Accenture as a potential comp. Check out the difference in margins. Why is that? I just made IBM a 10% position. The fear is palatable! They are different businesses. IBM sells services over the top of its software. Accenture does third party services. Accenture should be able to pivot better than IBM to other software providers. However, its business is also likely to prove to be a turd because the cloud is winning $$$'s over software. The number of consultants in tech going forward will go down meaningfully. Link to comment Share on other sites More sharing options...
oddballstocks Posted October 21, 2014 Share Posted October 21, 2014 For those that think this is overvalued I suggest you look at Accenture as a potential comp. Check out the difference in margins. Why is that? I just made IBM a 10% position. The fear is palatable! I believe IBM's billable rate is much higher than Accenture's rate. A $350/hr IBM consultant isn't unheard of, I've only met a few Accenture consultants billing at that rate. One was an MD leading a clinical reporting project. IBM will bill someone a few years out of college out at $350/hr if they can. IBM finds niches they can support and bills the heck out of clients, Accenture doesn't have that specialization. For example about 10 years ago I worked at a startup that was testing an IBM Bladecenter system (piece of junk, but I digress). We had blades continually fail so we called IBM. A guy who was in his late-60s came out to look at things. He starts to pull these blades apart and troubleshooting the circuits theorizing that the problem was bad resistors or capacitors. As the low man on the totem pole I was given the job of babysitting this guy in the data center. Which meant I had the privilege of listening to IBM war stories from the 1960s and 1970s, apparently the glory days there for these mainframe guys. The guy figured out the problem, but the execs at my company were so frustrated at the lack of quality they refused to pay for the support and shipped the entire system back. This guy was in the $350/hr category, his experience was extremely deep in a very narrow area. While the BladeCenter was junk our company was addicted to other IBM servers, which were very high quality. We must have purchased 100+ identical servers over the course of a year, this was for a 40 person startup. Link to comment Share on other sites More sharing options...
fareastwarriors Posted October 21, 2014 Share Posted October 21, 2014 The Truth Hidden by IBM’s Buybacks http://dealbook.nytimes.com/2014/10/20/the-truth-hidden-by-ibms-buybacks/?module=BlogPost-Title&version=Blog Main&contentCollection=DealBook Column&action=Click&pgtype=Blogs®ion=Body Link to comment Share on other sites More sharing options...
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