IBM - International Business Machines

[Charlie]

I bought today some IBM shares (10% of my portfolio).

Buffett´s buy price over the last 3 years is around 171,47.

Ironically the more the shares drop the more valuable the company gets, through repurchases.  :)

[Palantir]

Would some of you IBM bulls also be similarly bullish on Oracle?

[Guest valueInv]

Would some of you IBM bulls also be similarly bullish on Oracle?

 

Nope, looking to unload Oracle and also Red Hat.

[Palantir]

What is the reason you are selling out of Oracle?

 

I plan on holding Red Hat till it hits 70. Even then I may not sell.

[Charlie]

I like Buffetts´ comments in the 2011 Berkshire Hathaway annual report:

 

"As was the case with Coca-Cola in 1988 and the railroads in 2006, I was late to the IBM party. I have

been reading the company’s annual report for more than 50 years, but it wasn’t until a Saturday in March last

year that my thinking crystallized. As Thoreau said, “It’s not what you look at that matters, it’s what you see.”"

 

Better late to the party than never.  :)

[Guest valueInv]

What is the reason you are selling out of Oracle?

 

I plan on holding Red Hat till it hits 70. Even then I may not sell.

 

I have posted on what I call the "great disruption". The fundamentals of enterprise software are shifting.

It is not clear who (or even any) will be the winners.  You are already seeing the effects on Dell and others.

All this translates to risk. And I don't like holding risk.

 

For example, at one point Amazon was Red Hat's largest customer. Now, I'm told they run 90% Ubuntu and

don't pay anyone. They support it themselves.

[fareastwarriors]

http://www.bloomberg.com/news/2013-08-20/louis-gerstner-iii-son-of-celebrated-ibm-chairman-dies-at-41.html

 

Louis Gerstner III, Son of Celebrated IBM Chairman, Dies at 41

 

 

...He died on Aug. 14 after choking while dining in a restaurant, according to a death notice in the New York Times....

 

 

Condolences to the Gerstner family

[no_free_lunch]

Based on the 2015 estimate of $20 earnings, IBM 2015 LEAPS seem compelling.  You can do your own calculations but I went in on the $190 option for $12.50.  You are able to borrow the stock for 17 months, albeit slightly out of the money, for 6.9% which seems ridiculously cheap.  If the market thinks they can actually hit their target (admittedly in best-case it will be non-GAAP and you will have to exclude some one-time restructuring costs), I think it could trade in the $230-270 range, or perhaps a 25-35% price appreciation or 3-5x the option price. 

[no_free_lunch]

ValueInv,

 

I have posted on what I call the "great disruption". The fundamentals of enterprise software are shifting.

 

Now I am obviously bullish on IBM but nevertheless I agree with you on this point.  It just seems that it applies to IBM as well.  Are you betting on their services component?

[Guest valueInv]

ValueInv,

 

I have posted on what I call the "great disruption". The fundamentals of enterprise software are shifting.

 

Now I am obviously bullish on IBM but nevertheless I agree with you on this point.  It just seems that it applies to IBM as well.  Are you betting on their services component?

 

I am betting on their diversification. They have so many different business that they have the runway to adapt. It'll hurt them too, but less so than the others. Companies like Oracle,etc are tied to one business model, limited markets. They have to cannibalize their own businesses to adapt - a very hard shift for any business to make.

[Palantir]

I'm going to wait until it drops to 165 ish. I like the business, but it is slow growing, and very dependent upon constant buybacks to sustain this valuation IMO.

[rmitz]

I am betting on their diversification. They have so many different business that they have the runway to adapt. It'll hurt them too, but less so than the others. Companies like Oracle,etc are tied to one business model, limited markets. They have to cannibalize their own businesses to adapt - a very hard shift for any business to make.

 

From what I've seen and heard about the company changes late; I think they're basically cutting out the people who would be capable of adaptation.  They can buy people to consult on whatever, and that I think is more of the business that Buffett was interested in, but either they won't have to adapt, really, or they won't be able to.

[tombgrt]

Based on the 2015 estimate of $20 earnings, IBM 2015 LEAPS seem compelling.  You can do your own calculations but I went in on the $190 option for $12.50.  You are able to borrow the stock for 17 months, albeit slightly out of the money, for 6.9% which seems ridiculously cheap.  If the market thinks they can actually hit their target (admittedly in best-case it will be non-GAAP and you will have to exclude some one-time restructuring costs), I think it could trade in the $230-270 range, or perhaps a 25-35% price appreciation or 3-5x the option price. 

 

You do lose out on the dividends so add those into your cost of leverage.

 

The buybacks are very nice. If they buy back 150M shares between now and the end of 2015, share count will be around 950M. At the current stock price (by then) that's a market cap of $173B, at $160/share $152B (PE of 8) and at say $140/share (PE of 7) it's $133B. If one of the above scenarios would occur, they could easily continue their cannabilizing at an enormously fast rate. At an average price of $160 they would buy back another +- 185M shares in 2 years. By then the market cap just starts to become silly and we're almost talking about a PE of 5.5-6.5 without any additional EPS growth between 2015 and 2017. Ceteris paribus, I believe it shows the safety in the current share price and the eventual value in a market cap that drops even lower. I only consider the above possible if IBM fails horribly or if the market crashes for a prolonged period of time.

 

Idk if options are ok at this point. But if the thesis still holds by early 2015 and your options expire worthless at a strike of $190, it's likely a good bet to go for another round of (far?) OTM leaps. Once again, all else being equal...

 

[no_free_lunch]

tombgrt,

 

There are definitely some risks with the options, there always are right?  But there is also the risk that we go into economic freefall and then where is the bottom for IBM?  With options losses are capped at 7%.

 

If the stock is still at 180-190, then I guess I am out 7%.  However, like you said the next batch of options is then even more attractively priced.

 

I don't believe there is a loss of dividends.  As I am only in for 7% I can buy bonds with the other 93% of my cash.

 

There is also the possibility that europe emerges from depression, US growth continues and fears of a china crash diminish.  I view IBM as a proxy of global growth so in that case I could see it spiking.  $300 seems optimistic but not wildly so.  At that point it's almost 9x your LEAP investment.

 

I am mainly using this to reduce risk.  Basically I have about 3% in the 2015 leaps and it allows me to hold cash equal to about 42% of my portfolio (I am not there yet though) while still being exposed to market upside.  With the 42% cash, I can invest in short-term bonds and still get about 2% per year on that portion of the portfolio.  I am doing something similar with Teva as it also has unrealistically low volatility in the option prices relative to the equities appreciate potential.  I just need to find a couple more situations like this.

[no_free_lunch]

Since I have been thinking about IBM for the last while, I thought I would just record some of my thoughts on their competitive advantages:

 

1) Brand name effect on purchasing.  Large companies will give preference to IBM over most other competitors (except maybe oracle) based on their name.  IT is so complex that even people in IT don't really have time to understand what they are buying so it is always comforting to have a massive firm behind you.  You can always fall back on blaming IBM if things don't work out.  "IBM was considered the best by this study by X, how were we to know?"

 

2) Brand name effect on hiring.  IBM pads your resume.  Not in the same way as google or facebook but it has a certain cachet.  In spite of wage stagnation I think they will continue to attract good talent (not the best talent but good talent) and given point 1 that is all they need.

 

3) Brand/scale multiplier on acquisitions.  I think they can buy existing companies and due to their brand and existing sales infrastructure (not 100% sure if there is sales overlap) they should be able to increase sales almost immediately.  -- I haven't really done the homework to verify this point but I have read about this effect, it makes sense and it jives with my experiences.  This requires more DD.

 

4) Customer lock-in.  This is no different than other tech company but it is worth mentioning.  Even on their services side it is generally preferable to hire back the consultants that did the initial implementation so long as it wasn't too badly bungled.

 

5) Shift to outsourcing.  This is happening in various government levels and to a lesser extent in private industry where it is often deemed prudent to outsource IT work rather than keep staff.  I don't necessarily agree with it but it is a trend that I see continuing.

 

6) Patent powerhouse.  Not sure if this is significant but at the very least it strengthens 1 & 2.

 

[tombgrt]

I don't believe the bottom for IBM would be all that low, even if the S&P500 dropped 25-30% from here. You could always go heavier into the leaps and hedge yourself with far OTM puts on the index but that could get very expensive if one or more of your leap positions went south. 

[Charlie]

I´m always impressed with IBM, because every supermarket (around 10 different supermarkets) in my hometown has IBM cash registers. Since these are very large retailer like Aldi, Lidl etc. this must be big business.  :)

 

Does anybody know if they have a near-monopoly in this business?

[Guest wellmont]

I´m always impressed with IBM, because every supermarket (around 10 different supermarkets) in my hometown has IBM cash registers. Since these are very large retailer like Aldi, Lidl etc. this must be big business.  :)

 

Does anybody know if they have a near-monopoly in this business?

 

no NCR is big in the business. but it's also changing. online, square, paypal, etc....POS was a lock-in kind of business pre PC/Internet.

[Palantir]

Why doesn't this firm grow? This firm's revenue has been flat for the past ten years. I've read all the points about IBM's advantages - switching costs, brand name, diversified portfolio of services....but yet no growth.

[Sunrider]

As somebody whose partner has worked there and as somebody who almost accepted a position as a partner in the GBS practice I'll happily tell you:

 

They are inefficient as hell. The organisation is set up as an n-dimensional matrix structure that even the people that tried to hire me could never explain adequately. Partners are, of course, incentivised on sales but similarly have to give up a lot of their "sales" to other parts of the business whilst simultaneously being able to take credit for other part of the organisation's sales. A complete mess compared to, say, an Accenture (who on many IT projects will kick the socks off IBM). IBM gets hired because it's so big that if the customer makes enough noise they know that IBM can eventually be bullied into doing the right thing and delivering (if they didn't get around to that due to infighting/lack of coordination during the initial work).

 

So - their labs are allegedly amazing and there's really cool and relevant stuff done there (forget Watson, I mean things that big IT spending businesses actually care about at this stage) ... but again IBM struggles to bring a lot of this out of the labs .... in essence it's a big sales organisation but probably one of the worst setup ones.

 

... just my $0.02

 

[tombgrt]

So despite the terrible setup/organization, not terribly happy employees and customers, their lack of ability to compete properly, the dangers of changing technologies, etc. they maintained revenues. It seems that this has been true for many years.

 

Then how do they do it? Why was Buffett willing to pay a PE of 12-14? Why is it trading at a forward PE of 9 now? This isn't KO no. But it isn't trading at a forward PE of 17+ either nor is it a typical tech company.

 

I would be worried about the stagnant revenues if all of the above negatives were non-existent.

 

[Palantir]

So despite the terrible setup/organization, not terribly happy employees and customers, their lack of ability to compete properly, the dangers of changing technologies, etc. they maintained revenues. It seems that this has been true for many years.

 

 

Then how do they do it? Why was Buffett willing to pay a PE of 12-14? Why is it trading at a forward PE of 9 now? This isn't KO no. But it isn't trading at a forward PE of 17+ either nor is it a typical tech company.

 

Maintained is great, why aren't they GROWING revenues is the question.

[Palantir]

As somebody whose partner has worked there and as somebody who almost accepted a position as a partner in the GBS practice I'll happily tell you:

 

They are inefficient as hell. The organisation is set up as an n-dimensional matrix structure that even the people that tried to hire me could never explain adequately. Partners are, of course, incentivised on sales but similarly have to give up a lot of their "sales" to other parts of the business whilst simultaneously being able to take credit for other part of the organisation's sales. A complete mess compared to, say, an Accenture (who on many IT projects will kick the socks off IBM). IBM gets hired because it's so big that if the customer makes enough noise they know that IBM can eventually be bullied into doing the right thing and delivering (if they didn't get around to that due to infighting/lack of coordination during the initial work).

 

So - their labs are allegedly amazing and there's really cool and relevant stuff done there (forget Watson, I mean things that big IT spending businesses actually care about at this stage) ... but again IBM struggles to bring a lot of this out of the labs .... in essence it's a big sales organisation but probably one of the worst setup ones.

 

... just my $0.02

 

Great info. I'm basically comparing IBM to ACN, and am leaning towards ACN right now.

[alwaysinvert]

Why doesn't this firm grow? This firm's revenue has been flat for the past ten years. I've read all the points about IBM's advantages - switching costs, brand name, diversified portfolio of services....but yet no growth.

They sold the PC business in 2004, which at that point was a $10b business. If you adjust for that they have actually grown the rest of the business almost $30b dollars in revenue for the last 10 years. Not taking account of further divestitures. So by no means could you call IBM a no-growth company for the last 10 years.

 

[Palantir]

Even if you remove the divestiture.

 

Revenue:

98,786 (2007)

...

104,507 (2012)

 

= 1.1% yoy growth over the past five years.....

= 1.9% since 2005 after jettisoning their PC division.

 

So I correct my self, "really slow growing" rather than "no growth". 1.1% yoy growth is pretty low still.