IBM - International Business Machines

[beerbaron]

I have been looking at IBM for the last 2 years. I'm happy to finally deploy some cash, I think it's been a year since I bough anything (except arbitrages). Well I only need to find a home for that remaining 25% cash now!

 

BeerBaron

 

What finally triggered your purchase, today's drop, or more than that? What are your thought about the earnings?

 

Well my trigger price was 175$ which it finally reached. My thesis on IBM is quite simple:

• It's a well know brand that gets premium prices because of it. If you are going to cloud your internal database you risk very little for your job/company if you go with IBM and everything if you go with a less renowed firm
  
• It's demonstrated it's ability to reinvent itself for 100 years.
  
• It has a good capital allocation strategy with lots of buybacks in place.
  
• It does not mind engaging in agressive cost cutting measures.
  
• The price is cheap for a diversified dominant player.
  

 

BeerBaron

 

[fareastwarriors]

http://online.wsj.com/news/articles/SB10001424052702304410204579141650186395682?mod=WSJ_hps_sections_business

 

IBM Shakes Up Growth Markets Unit

 

James Bramante Is Reassigned After Division's Poor Quarterly Results

 

[Phaceliacapital]

Well my trigger price was 175$ which it finally reached. My thesis on IBM is quite simple:

• It's a well know brand that gets premium prices because of it. If you are going to cloud your internal database you risk very little for your job/company if you go with IBM and everything if you go with a less renowed firm
  
• It's demonstrated it's ability to reinvent itself for 100 years.
  
• It has a good capital allocation strategy with lots of buybacks in place.
  
• It does not mind engaging in agressive cost cutting measures.
  
• The price is cheap for a diversified dominant player.
  

 

BeerBaron

 

Nobody ever got fired for buying IBM :)

[valueinvesting101]

Looks like last Berkshire bought 11mn shares above current price. That is 11 mn out of 68 mn so around 16% of current position.

With additional buyback since Nov 2011 each share should be more valuable. Shares outstanding went down by around 10%.

[Palantir]

I agree with the notion that IBM's free cash flow is probably overstated. Apart from the fact that it's using all of it's FCF in buying back stock (an outflow), it's a serial acquirer, and is buying on average about 3B worth of acquisitions a year. All this combines to make it hard to value, esp when you add buybacks into the valuation.

 

 

Speaking to some IBM employees who work in their global delivery center, their core attribute is basically switching costs.

 

 

Given their sluggish growth, annuity-like earnings structure, I think the best way to look at it is a slow growing equity bond.....but you need a low price for that.

[gfp]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

What's his line, 'a good way to stay rich, not get rich' or something along those lines..

[compoundinglife]

Looking at valueline and doing some napkin math. They have bought back 50 percent of the stock in the past 16 years. If they continue at a similar clip then the next 50 percent will take 8 years. So you are at a 30 EPS with no growth at all. Factor in *some* growth and it does not seem unreasonable to say that they would be at 40-50 EPS in 8 years meanwhile getting dividends. 50 precent buyback over the next 8 years might be a high estimate since share price has appreciated alot over the past 16 years. But it still seems like an attractive long term investment.

[plato1976]

I believe the investment thesis is more complex here.

What matters if free cash flow - and looks like the free cash flow / earning ratio is low at IBM and getting lower ; now sth like 0.65

IBM is doing quite some acquisition and we should think it as some kind of capex

I think now the free cash flow per share is slightly above $10

 

From this perspective, IBM is not as cheap as it looks

 

How will IBM adapt to the real cloud era and how much it will spend for a successful transition

These are all open questions. I think I am clueless now, but when IBM slides to 150 or lower I am

so interested to try to understand

 

Looking at valueline and doing some napkin math. They have bought back 50 percent of the stock in the past 16 years. If they continue at a similar clip then the next 50 percent will take 8 years. So you are at a 30 EPS with no growth at all. Factor in *some* growth and it does not seem unreasonable to say that they would be at 40-50 EPS in 8 years meanwhile getting dividends. 50 precent buyback over the next 8 years might be a high estimate since share price has appreciated alot over the past 16 years. But it still seems like an attractive long term investment.

[Palantir]

Looking at valueline and doing some napkin math. They have bought back 50 percent of the stock in the past 16 years. If they continue at a similar clip then the next 50 percent will take 8 years. So you are at a 30 EPS with no growth at all. Factor in *some* growth and it does not seem unreasonable to say that they would be at 40-50 EPS in 8 years meanwhile getting dividends. 50 precent buyback over the next 8 years might be a high estimate since share price has appreciated alot over the past 16 years. But it still seems like an attractive long term investment.

 

I disagree, once you back out the buy backs and acquisitions out of their earnings, their baseline eps number looks more modest. Furthermore I disagree that earnings are the relevant metric vs FCf.

[jay21]

Found this interesting tab on morningstar:  http://financials.morningstar.com/ratios/r.html?t=IBM&region=USA&culture=en-US

 

Basically, shows the story of IBM over the last 10 years.  Here's some highlights with December 2003 being the first number and December 2012 being the second:

 

Operating Margin: 11.3%  19.6%

FCF: $10b  $15.5b

FCF a share: $5.70  $13.42

Financial Leverage: 3.75  6.32

ROIC: 14.92%  31.39%

P/E: 21.4  12.3

[Guest Dazel]

 

 

We have bought here.

Only in extraordinary situations do you actually hear Warren Buffett say" he is comfortable" with his second largest stock purchase of all time... And an explanation on live t.v of his thesis. This is free money...the numbers only back his argument....we see it...we hope it falls more.

 

Dazel.

[Guest Dazel]

 

 

Check the share count from 2003 to 2012...

Looks Like Buffet may have another Katherine Graham like Washington Post situation with the CEO. Take a look at how many shares The Washington post bought back after Warren took his position in 1973.

 

Dazel.

 

 

 

[hyten1]

dazel, i agree, i wish it falls more, i have also sold a bunch of puts (get some premium at lower strike price) as well as initiated a position last week

 

 

 

 

 

We have bought here.

Only in extraordinary situations do you actually hear Warren Buffett say" he is comfortable" with his second largest stock purchase of all time... And an explanation on live t.v of his thesis. This is free money...the numbers only back his argument....we see it...we hope it falls more.

 

Dazel.

[ItsAValueTrap]

Wasn't washington post a wonderful business that grew revenues and earnings over time?  IBM looks like it is shrinking right now, not growing.

[value-is-what-you-get]

Wasn't washington post a wonderful business that grew revenues and earnings over time?  IBM looks like it is shrinking right now, not growing.

 

If I were voting, I would agree with that statement.  As I'm weighing, I disagree with that statement.

[Palantir]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

What's his line, 'a good way to stay rich, not get rich' or something along those lines..

 

Why do you feel IBM is going to compound at 10%+? Given a FCF of 15B, average acquisitions of 2-3B, we get a distributable FCF of 12.5B, which over their EV =(189B+20B Net Debt) = 209, gives me a d-FCF yield of 6%. If you add their pension liabilities to EV, it will be lower, unless I read that part wrong.

 

Now if you are arguing that WEB is taking a 5-6% bond and leveraging it via his float, I could see your argument, but I don't know how the math works for that. :)

[Guest valueInv]

I don't know much about SAP, but this would be interesting to study:

 

http://gigaom.com/2013/10/21/saps-shift-to-cloud-may-just-be-paying-off/

 

If this is true, this is the first time I've seen a big enterprise company make the transition.

[jay21]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

What's his line, 'a good way to stay rich, not get rich' or something along those lines..

 

Why do you feel IBM is going to compound at 10%+? Given a FCF of 15B, average acquisitions of 2-3B, we get a distributable FCF of 12.5B, which over their EV =(189B+20B Net Debt) = 209, gives me a d-FCF yield of 6%. If you add their pension liabilities to EV, it will be lower, unless I read that part wrong.

 

Now if you are arguing that WEB is taking a 5-6% bond and leveraging it via his float, I could see your argument, but I don't know how the math works for that. :)

 

Why are you backing out acquisitions?  I usually do OCF - Maint CapEx.  I would count acquisitions as growth CapEx.

[Palantir]

^ I think in Tech, due to regular product updates and changes in technology, maintenance CapX and growth CapX is hard to separate, and in a sense is basically the same, and feel it is safer to back out acquisitions especially if the firm is a serial acquirer the way IBM is. The way I see it, acquisitions are ways to buy capabilities rather than develop them organically, and hence a form of R&D that may not immediately accrue profit.

[gfp]

http://www.bloomberg.com/news/2013-10-22/buffett-praises-ibm-profit-prospects-after-share-slump.html

[Palantir]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

Why do you feel IBM is going to compound at 10%+? Given a FCF of 15B, average acquisitions of 2-3B, we get a distributable FCF of 12.5B, which over their EV =(189B+20B Net Debt) = 209, gives me a d-FCF yield of 6%. If you add their pension liabilities to EV, it will be lower, unless I read that part wrong.

 

Bump...

[tombgrt]

Warren

http://www.bloomberg.com/news/2013-10-22/buffett-praises-ibm-profit-prospects-after-share-slump.html

 

 

I'd prefer if he didn't say anything about IBM. Mr Market happily pushing the stock higher again after this (and his Charlie Rose appearance?). :(

[mcliu]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

Why do you feel IBM is going to compound at 10%+? Given a FCF of 15B, average acquisitions of 2-3B, we get a distributable FCF of 12.5B, which over their EV =(189B+20B Net Debt) = 209, gives me a d-FCF yield of 6%. If you add their pension liabilities to EV, it will be lower, unless I read that part wrong.

 

Bump...

 

7% FCF yield + 3% FCF growth through inflation + x% organic FCF growth + y% valuation expansion + z% value accretion through share buybacks = >10%?

[Palantir]

Do you really see any FCF growth from either inflation or organic? Anyways, if FCF growth is through inflation, then it's a wash.

 

Valuation expansion is not a given, and given that you're using the base FCF yield of 7%, to credit value accretion from buybacks is double counting.

 

10% growth seems highly optimistic unless they manage to grow organically, which in the "slow equity bond" scenario doesn't happen.

[twacowfca]

I think the slow-growing, annuity like equity bond thing is exactly what attracted Warren.  He's content to lend large sums at 10-12%, he's content to invest large sums in regulated utilities.  He can put a not-insignificant sum into IBM and expect it to compound at 10+% in a tax-efficient manner and he's satisfied with that.

 

What's his line, 'a good way to stay rich, not get rich' or something along those lines..

 

Why do you feel IBM is going to compound at 10%+? Given a FCF of 15B, average acquisitions of 2-3B, we get a distributable FCF of 12.5B, which over their EV =(189B+20B Net Debt) = 209, gives me a d-FCF yield of 6%. If you add their pension liabilities to EV, it will be lower, unless I read that part wrong.

 

Now if you are arguing that WEB is taking a 5-6% bond and leveraging it via his float, I could see your argument, but I don't know how the math works for that. :)

 

 

IBM is the only large cap company that has an over funded pension plan, medical plan

etc. for retirees.  :)