IBM - International Business Machines

[Simple Investor]

haha.  +1 

 

so great.

[scorpioncapital]

I think the 2035 prediction assumes some small amount of growth otherwise I can't see the share count being below 200 million with the current 4% per year purchases.

[NewbieD]

IBM doing claims handling of cyberinsurance: https://www.google.se/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCIQFjAAahUKEwijk6mErtHIAhUC6CwKHUX_ArY&url=https%3A%2F%2Fwww-03.ibm.com%2Fpress%2Fus%2Fen%2Fpressrelease%2F46320.wss&usg=AFQjCNGXSKHOMSHZbmc5L8g54vVlPAI86A&sig2=p-fyQNBZYQ0sWrpdMX2Img

[jawn619]

OPRAH TAKES 10% stake in IBM. "I believe in the @IBM program so much I decided to invest, join the Board, and partner in #IBMfamily evolution."

[AzCactus]

OPRAH TAKES 10% stake in IBM. "I believe in the @IBM program so much I decided to invest, join the Board, and partner in #IBMfamily evolution."

 

I don't think Oprah has $14 billion, but at the rate weightwatchers is growing she will by the end of the month lol

[thefatbaboon]

IBM has had a few years of Pre tax income declines.

 

IBM often refers to Clouds, Analytics etc as growing at 65%, 20%, 30% etc.

 

We are often told that IBM's core franchises in services and software are "annuity like".

 

I'm puzzled how these three facts can all be true at the same time.

 

Surely the annuities should be rolling off slowly and not precipitously?  So how do the "strategic imperatives" that are supposedly going gangbusters always get completely swamped by the performance of the traditional business which is supposed to be annuity-like?

 

I don't understand IBM's business well - if someone can explain this to me I'd be very grateful.

Thanks

[KCLarkin]

IBM has had a few years of Pre tax income declines.

 

IBM often refers to Clouds, Analytics etc as growing at 65%, 20%, 30% etc.

 

We are often told that IBM's core franchises in services and software are "annuity like".

 

I'm puzzled how these three facts can all be true at the same time.

 

Surely the annuities should be rolling off slowly and not precipitously?  So how do the "strategic imperatives" that are supposedly going gangbusters always get completely swamped by the performance of the traditional business which is supposed to be annuity-like?

 

There are a lot of moving parts:

- currency impact

- pricing weakness

- only ~65% of revenue is annuity (just a guesstimate too lazy to look this up)

- increased investment in strategic imperatives

- some % of strategic revenue is cannibalizing core

- strategic imperatives are growing from small base (relative to core)

 

Anyway, if you are interested in IBM, I recommend the last investor day. They cover the transition from "core" to "strategic" in detail.

 

[thefatbaboon]

IBM has had a few years of Pre tax income declines.

 

IBM often refers to Clouds, Analytics etc as growing at 65%, 20%, 30% etc.

 

We are often told that IBM's core franchises in services and software are "annuity like".

 

I'm puzzled how these three facts can all be true at the same time.

 

Surely the annuities should be rolling off slowly and not precipitously?  So how do the "strategic imperatives" that are supposedly going gangbusters always get completely swamped by the performance of the traditional business which is supposed to be annuity-like?

 

There are a lot of moving parts:

- currency impact

- pricing weakness

- only ~65% of revenue is annuity (just a guesstimate too lazy to look this up)

- increased investment in strategic imperatives

- some % of strategic revenue is cannibalizing core

- strategic imperatives are growing from small base (relative to core)

 

Anyway, if you are interested in IBM, I recommend the last investor day. They cover the transition from "core" to "strategic" in detail.

 

I've listened to it and been trying for years to understand this company.

There are always so many moving parts. Taxes, rebalancings, sales, purchases, currencies...

 

It's just the simple arithmetic i don't get.  PTI in the third quarter was off about 20% for software and services.  Take the 65% annuity - that should be down 10% for currency (flat ex currency).  I imagine the strategics aren't in that section as they're brand new and one can hardly call something new and unproven an annuity.  So that means they're in the 35%.  How much of PTI are the strategics, 15%?  and they are up 20% after adjusting for currency.  So thats -6.5% contribution from annuities, +3% from strategics...and we have only got 20% of the pie left to play with so how the hell do we get to -20%?  The 20% part of the business that isn't annuity-like or and imperative must  be down 80% to get the whole result to -20%.  Which is ridiculous.  I reckon a lot of this annuity talk is rubbish.  For this to have happened for the last 3 years a significant amount of the hurt has got to be happening in the so called annuities.

[KCLarkin]

I imagine the strategics aren't in that section as they're brand new and one can hardly call something new and unproven an annuity.

 

This is incorrect. If they sign a 10 year hybrid cloud contract, that would be considered an annuity stream. IIRC, the strategic business have much higher recurring content than the core business.

 

But regardless, I don't understand why you are using PTI for these calculations. You should be looking at revenue. This isn't true, but your math for PTI could easily be explained by assuming that the strategic businesses are losing money while they get to scale.

 

Anyway, this presentation covers this topic much better than I can:

http://www.ibm.com/investor/att/pdf/2015_Investor_Briefing_02_Financial_Overview.pdf

 

 

[orthopa]

Apparently according to Motley Fool by 2035 IBM will have 1 share outstanding.

 

I'm not sure I understand how this works in practice vs theory. It seems like a singularity at the centre of a black hole. I am pretty sure way before we get to 1 share, say when we get to the event horizon of perhaps 10 million shares , the stock price will be sky high as someone has to be bought out and there won't be many holders left. I strangely perceive Buffett as being one of the last holdouts, perhaps 1 of the remaining last 2 shares! By that point, each of the 2 shares will be each worth $70,000,000,000/share assuming no increase in valuation from today.

 

This is what I believe Buffet sees in the business. A cannibal with a good cash flow yield, that will buy back stock and pay a decent dividend. Not much different then the tobacco business IMO. Top line revenue has nearly flat lined for years but the stock price keeps rising due to lower costs and shares outstanding.

 

If Buffet is able to double his % of the company he owns say over the next 10-15 years I think he would see that as a successful investment. Also in Buffets own forever as a "business owner" mind is it a bad thing every quarter the % you own of the company and your share of the cash flow increases meaningfully?

 

He probably just projects his ownership in the company and his share of the cash flow with massive buybacks and sees any top line growth as gravy.

 

He probably happier then a pig in $hit he is able to buy more ~9 times earnings with massive buybacks. Glancing at the release quickly free cash flow is flat YOY but there are 20 million less shares outstanding. His share of that cash increased....Someone would then say the price has only gone down and trades at a very low multiple....thats exactly what he wants.  :)

[KCLarkin]

Top line revenue has nearly flat lined for years but the stock price keeps rising due to lower costs and shares outstanding.

 

Higher margins are driven in large part by their "shift to higher value". If you trade a $100B hardware business for a $100B software business, your revenue will flat line but your profitability will improve.

[Picasso]

It was funny listening to a CNBC interview this morning where the analyst was pleading for IBM to buy Workday, or Netsuite, or Plao Alto Networks, or some other business trading for a ridiculous valuation.  I can't say that IBM's existing business is that amazing, but I doubt you fix anything by exchanging their cash/stock for something much less productive.

 

Then again maybe the long-term cash flow/benefit from that kind of acquisition is actually valuable.  I sure hope they don't buy something using a lot of their stock.  How silly would that be to buy up a ton of stock in the 180's and then issue it all back at $130 for something that might or might not work.

 

I told myself I'd buy into the stock around $125.  We aren't that far away.

[portfolio14]

This is what I believe Buffet sees in the business. A cannibal with a good cash flow yield, that will buy back stock and pay a decent dividend. Not much different then the tobacco business IMO. Top line revenue has nearly flat lined for years but the stock price keeps rising due to lower costs and shares outstanding.

 

+1.

 

Downside protection: cannibalising while maintaining ROIC, allowing the business (i.e. top line) to shrink if necessary. (Remember BRK when it was still a textile mill?)

 

Upside: cloud, watson, whatever. They are all optionality.

 

(No position (yet))

[aws]

I'm sure most people have read and agree with Buffett's point about the best thing that can happen for long-term shareholders is for the price to go down and to stay low for several years.  Doing so magnifies the effect of the buyback and allows individual investors to add to their positions at lower costs.  If the low prices draw in Buffett himself to add shares that's great too because those shares will effectively be removed from the float once they find a near permanent home in Berkshire.  So in theory we should be cheering for every decline in the share price so long as the underlying business is still doing well.

 

However it's sometimes tough to maintain your conviction on the business and tune out the noise of a constant barrage of negative articles and pain of seeing big unrealized losses in your portfolio.  I don't consider myself an expert on IBM by any means but even I think most of what you see and hear from the pundits are uninformed opinions.  They will point out the easy facts like the revenue declines, while missing the fact that a big piece of that is strategic divestitures, another big piece is currency, and that altogether it doesn't really hurt EPS because there are many fewer shares outstanding compared with years in the past.  They are just trying to get paid for writing the article or get on TV with the story people want to hear - that the tech giant IBM is faltering. 

 

I certainly haven't been convinced to sell my shares, and I have a hard time imagining that there will be news in the near future that will change that.  But even though I know it's not the absolute best thing that could happen for the long-term it would be nice to see the price action start to agree with me soon.  I know that doesn't validate any thesis but it would be a little comforting anyway.

[dwy000]

I'm sure most people have read and agree with Buffett's point about the best thing that can happen for long-term shareholders is for the price to go down and to stay low for several years.  Doing so magnifies the effect of the buyback and allows individual investors to add to their positions at lower costs.  If the low prices draw in Buffett himself to add shares that's great too because those shares will effectively be removed from the float once they find a near permanent home in Berkshire.  So in theory we should be cheering for every decline in the share price so long as the underlying business is still doing well.

 

However it's sometimes tough to maintain your conviction on the business and tune out the noise of a constant barrage of negative articles and pain of seeing big unrealized losses in your portfolio.  I don't consider myself an expert on IBM by any means but even I think most of what you see and hear from the pundits are uninformed opinions.  They will point out the easy facts like the revenue declines, while missing the fact that a big piece of that is strategic divestitures, another big piece is currency, and that altogether it doesn't really hurt EPS because there are many fewer shares outstanding compared with years in the past.  They are just trying to get paid for writing the article or get on TV with the story people want to hear - that the tech giant IBM is faltering. 

 

I certainly haven't been convinced to sell my shares, and I have a hard time imagining that there will be news in the near future that will change that.  But even though I know it's not the absolute best thing that could happen for the long-term it would be nice to see the price action start to agree with me soon.  I know that doesn't validate any thesis but it would be a little comforting anyway.

 

+1

[thefatbaboon]

I'm sure most people have read and agree with Buffett's point about the best thing that can happen for long-term shareholders is for the price to go down and to stay low for several years.  Doing so magnifies the effect of the buyback and allows individual investors to add to their positions at lower costs.  If the low prices draw in Buffett himself to add shares that's great too because those shares will effectively be removed from the float once they find a near permanent home in Berkshire.  So in theory we should be cheering for every decline in the share price so long as the underlying business is still doing well.

 

However it's sometimes tough to maintain your conviction on the business and tune out the noise of a constant barrage of negative articles and pain of seeing big unrealized losses in your portfolio.  I don't consider myself an expert on IBM by any means but even I think most of what you see and hear from the pundits are uninformed opinions.  They will point out the easy facts like the revenue declines, while missing the fact that a big piece of that is strategic divestitures, another big piece is currency, and that altogether it doesn't really hurt EPS because there are many fewer shares outstanding compared with years in the past.  They are just trying to get paid for writing the article or get on TV with the story people want to hear - that the tech giant IBM is faltering. 

 

I certainly haven't been convinced to sell my shares, and I have a hard time imagining that there will be news in the near future that will change that.  But even though I know it's not the absolute best thing that could happen for the long-term it would be nice to see the price action start to agree with me soon.  I know that doesn't validate any thesis but it would be a little comforting anyway.

 

+1

 

Like Buffett I love a languishing stock and share repurchases where the underlying business is sound.  And I truly don't care about languishing prices.  I have been a shareholder in IBM for nearly 5 years and unfortunately have never enjoyed it.  Not because of negative press, or the languishing stock price, but simply because management is always obfuscating.    Do you guys recall the tax games they were playing in '13 in order to hit EPS numbers? They were missing pre-tax by 10% to 20% and then managing taxes to hit EPS and then being total weasels when questioned by analysts.

 

It's true there have been significant headwinds - currency is by far the biggest - but also there have been some tailwinds that are not drawn out.  For example, anyone listen to Rometty's "these are what I like to call empty calories"...IBM has divested significant low margin and money losing divisions...so why has there been no benefit to margins?  Quite the opposite, margins have gotten squeezed significantlysince last year.  Or what about all the work force rebalancing charges that were supposed to benefit margins...I think I have seen a cumulative +$5bn of these charges.  Or, what about all the acquisitions, R&D and capex over the last 5 year...a cumulative investment of $65billion!  What pre tax income have we gained with that?  Fundamentally IBM strikes me as a self-promotional and dishonest company who always emphasize excuses. It is not disastrous by any means - just not my kind of management.

 

At the end of the day PTI for 9months of 2011 was 13.7bn, 2012 was 14.0bn, 2013 was 12.6bn, 2014 was 12.9bn, and in 2015 10.8bn. A 21% decline.

And shares outstanding have gone from 1.2bn in Q3 2011 to 0.98 in Q3 2015. A 19% decline.  In that sense the number of slices has shrunk at pretty much the same pace as the pie.  So of course we have not suffered terribly.  That said this is not a stable or slow growing business, this is a proper decline over a meaningful amount of time and the share shrink has merely helped to offset the decline in intrinsic value per share. 

 

I think IBM has been truly dead money.  Not in the sense that expression is normally used but in the sense that I think intrinsic value per share today (with the last 4 years of dividends added in) is about equal to intrinsic value per share in 2011.  The business was worth about $240bn in Q3 2011 ($200 per share).  It has paid about $15bn of cum dividends.  And today it is worth about $185bn ($190 per share).  Together with the $14 per share or so of dividends the $200 bird in the hand has been worth a $190+$14 bird in the bush 4 years later. 

 

IBM has incredible FCF returns and it is too cheap to sell today but I'm very excited to not own this company.  No great insights about the technology side but in a general-management-sense I do not like them.  They are the kind of people at school sports who arrive in fancy gear, talk themselves up and then always have a whole book of excuses for after the game. 

[Palantir]

In 10 years, assuming a zero growth situation, what do bulls expects IBM FCF/S to be?

[thefatbaboon]

In 10 years, assuming a zero growth situation, what do bulls expects IBM FCF/S to be?

 

That seems a stupid question.  If you assume, as you say, zero growth then obviously FCF/S in 10 years is simply FCF/S today adjusted for however many shares get repurchased over the ten years.  Is that what you meant to ask?

[Palantir]

Yes

[xtreeq]

Like Buffett I love a languishing stock and share repurchases where the underlying business is sound.  And I truly don't care about languishing prices.  I have been a shareholder in IBM for nearly 5 years and unfortunately have never enjoyed it.  Not because of negative press, or the languishing stock price, but simply because management is always obfuscating.    Do you guys recall the tax games they were playing in '13 in order to hit EPS numbers? They were missing pre-tax by 10% to 20% and then managing taxes to hit EPS and then being total weasels when questioned by analysts.

 

It's true there have been significant headwinds - currency is by far the biggest - but also there have been some tailwinds that are not drawn out.  For example, anyone listen to Rometty's "these are what I like to call empty calories"...IBM has divested significant low margin and money losing divisions...so why has there been no benefit to margins?  Quite the opposite, margins have gotten squeezed significantlysince last year.  Or what about all the work force rebalancing charges that were supposed to benefit margins...I think I have seen a cumulative +$5bn of these charges.  Or, what about all the acquisitions, R&D and capex over the last 5 year...a cumulative investment of $65billion!  What pre tax income have we gained with that?  Fundamentally IBM strikes me as a self-promotional and dishonest company who always emphasize excuses. It is not disastrous by any means - just not my kind of management.

 

At the end of the day PTI for 9months of 2011 was 13.7bn, 2012 was 14.0bn, 2013 was 12.6bn, 2014 was 12.9bn, and in 2015 10.8bn. A 21% decline.

And shares outstanding have gone from 1.2bn in Q3 2011 to 0.98 in Q3 2015. A 19% decline.  In that sense the number of slices has shrunk at pretty much the same pace as the pie.  So of course we have not suffered terribly.  That said this is not a stable or slow growing business, this is a proper decline over a meaningful amount of time and the share shrink has merely helped to offset the decline in intrinsic value per share. 

 

I think IBM has been truly dead money.  Not in the sense that expression is normally used but in the sense that I think intrinsic value per share today (with the last 4 years of dividends added in) is about equal to intrinsic value per share in 2011.  The business was worth about $240bn in Q3 2011 ($200 per share).  It has paid about $15bn of cum dividends.  And today it is worth about $185bn ($190 per share).  Together with the $14 per share or so of dividends the $200 bird in the hand has been worth a $190+$14 bird in the bush 4 years later. 

 

IBM has incredible FCF returns and it is too cheap to sell today but I'm very excited to not own this company.  No great insights about the technology side but in a general-management-sense I do not like them.  They are the kind of people at school sports who arrive in fancy gear, talk themselves up and then always have a whole book of excuses for after the game. 

 

++1

[Simple Investor]

I’ve been long IBM for years. 

 

Since 2010 IBM has spent about 73Billion on share buybacks.  That is currently 50% of the market cap today or 40% of the market cap in 2010.  But diluted shares outstanding have went from 1.287 to 979 or 23% reduction. 

 

All this about the savings of buybacks vs dividends I get.  But lets’ get the real story out.  Huge buybacks does not necessarily mean huge share count reduction.  In a sense it looks like half the buybacks are going right back to the managers. 

 

73 Billion for a 23% increase in ownership.  How about you payout the 73Billion in dividends and I will deal with the 15% tax. 

 

If I’m wrong on my number please let me know. 

 

[ERICOPOLY]

I’ve been long IBM for years. 

 

Since 2010 IBM has spent about 73Billion on share buybacks.  That is currently 50% of the market cap today or 40% of the market cap in 2010.  But diluted shares outstanding have went from 1.287 to 979 or 23% reduction. 

 

All this about the savings of buybacks vs dividends I get.  But lets’ get the real story out.  Huge buybacks does not necessarily mean huge share count reduction.  In a sense it looks like half the buybacks are going right back to the managers. 

 

73 Billion for a 23% increase in ownership.  How about you payout the 73Billion in dividends and I will deal with the 15% tax. 

 

If I’m wrong on my number please let me know.

 

A 23% decrease in shares is roughly a 30% increase in ownership. 

 

Not a 23% increase.

 

Similarly (an easier example) a 50% decrease in shares is a 100% increase in ownership.

 

[Simple Investor]

Good point.  I haven't thought about it that way. 

 

 

[Simple Investor]

If I own all my shares in my IRA (which I do) then the extra 73 Billion is 40% of the 2010 market cap.  Or in a non retirement account after 15% fed a 34% return on the 2010 market cap. 

 

The promotion of the buybacks doesn't tell the entire story. And its promoted in an shady way.  In my opinion. 

[KCLarkin]

I’ve been long IBM for years. 

 

...

 

In a sense it looks like half the buybacks are going right back to the managers.

 

Why do you own the stock if you don't understand it? One of the few good things you can say about IBM right now is that they don't dilute their shareholders.