A mistake, like Tesco? Or opportunity to coat-tail for the rest of us?
Stating the obvious - financials look good on paper. 10-ish forward P/E, nice dividend + lots of buybacks, management cares less about top line than bottom line so high RoE, etc. Declining hardware and software businesses, cloud has yet to take off. Brand worth something.
Prima facia, 10 straight quarters of declining revenues and EPS of $3.68 in 4thQ (vs their original target of $20 per yr for 2015/16) doesn’t look good. Whilst SAP is not a like-for-like comparison, we can compare their cloud business - yesterday they too scrapped their EPS target. Whilst SAP CEO seemed alright in his Bloomberg interview - I sensed a bit of overconfidence.
EDIT - 3.68 is for the quarter
3.68 is what they get in a quarter. not for an entire year. they estimated 20 before now its prolly 16. so down 20% in eps estimate. From its 2012 peak, its down 28% in price. pretty sure buffet is buying it because it is trading cheaply and also it is a pretty big brand that changes by the decade. right now its trading at 9.18x 2016 eps multiple vs 17x for the general market. ibm’s been around since 1880. through those years they have evolved and remained competitive. IBM today is different from 10 yrs ago, and 10 is different from 20, and so forth. they literally change their portfolio pretty rapidly and spend their resources in capex juss as much as in acquisitions (historically… they were slow on cloud, but now they are refocusing on it. people think that there is further downside due to the change in strat. but at least there is margin of safety at its current price. hope it works out for him. didnt really do that deep of a dive. but i checked it out cuz im a big buffett fan.
My bad, was meant to be Q.
Why not just own the fund Buffet manages? (sarcasm) But really, do you think there is alpha is selectively picking some of his deals?
i mean he has produced alpha for the last 40+ yrs at about a 20% CAGR, that is extremely unusual. with that said, he is also managing a lot of money, so most of his investments will prolly juss follow the market. But i am sure some of his investments will ahve a ton of alpha.
^mb he was using deflated balls
They carelessly engineered their EPS through buybacks instead of investing in their business. They need to restructure from the bottomup and go for growth markets vs “the same ole thing”.
^ An IBM smartphone? 
haha! 5-years too late.
They’re holding onto a lot of their legacy infrastructure/customer/Application hosting services. Their problem is the same one HP (esp. the old EDS division they aquired to compete with IBM) is struggling, they’ve just been able to hide better for longer. They need to badly get back to what is a major driver in their industry which is digitalizing big bulky complex data on an enterprise scale into the cloud as a single simplified offering. They’re way behind unfortantely and their legacy assets will continue to erode in their ability to generate robust cashflow.
I’ve heard others say this, too. You can tell investor sentiment sucks when repurchases are “engineering EPS”, when for everyone else its called “rewarding shareholders” with their share repurchases.
Tons of tech companies are sitting on billions in cash earning ~50 to 100bps and doing NOTHING with it, but IBM is the one criticized for returning cash to shareholders?? I’m not a technology analyst so I don’t really have an opinion on IBM (I’d short it if anything), but man, people really hate IBM stock right now!
Last I checked this stock was Buffett vs. Druckenmiller… how you gonna bet against Druck??
I hate this stock, and never had the cojones to short it despite wanting to. That said, Buffett’s stock picks shouldn’t be judged in isolation, you have to remember he’s investing via a leveraged holding company structure, so 7% return to him is more like 15%. I don’t think it’ll do great, but it’ll probably survive OK.
Let’s not confuse creating shareholder value with providing shareholder rewards.
Issuing debt in order to fabricate the “$20 EPS by 2015” is financial engineering and was not a long-term business strategy investors should be happy about. If IBM was a cash cow, as we always assume big blue is/was, they should have only marginally leveraged their balancesheet while using existing cash flow to either finance the share repurchases or invest in their business.
Now they’re stuck with a shrinking business and a higher debt burder. Doesn’t sound like its creating shareholder value to me but i’ll let the chart speak
^ My point is “financial engineering” has a negative connotation and it’simplying sentiment on the stock sucks which was really my only point. Lots of companies borrow to repurchase shares and mostly often its applauded by the street. Reducing your share count is a perfectly fine thing to do, and it’s not like IBM has overleveraged itself or anything. Concern about their balance sheet is unfounded, though.
IBM has AA-/Aa3 credit ratings, its 5-year CDS pricing is 52bps, and it’s 10-year maturities have YTM’s below 3% at current pricing. IBM can go out and issue 10-year notes at ~3% and buy back its stock at 9x forward P/E and the debt markets have no major concern. Not the worst strategy. It can’t be a recurring strategy, though.
I agree their business is declining and they face major issues, but they do use FCF to buy back around half of their shares with the rest done by cheap debt issuance. I’m really not arguing with you or anything. You and others are calling it financial engineering, which is a sign of people hating this company. I don’t know what else the company can do at this point to make up for past mistakes…buy a high flying “new tech” company at +100x forward earnings (if they are even profitable)??
I didn’t mean to make financial engineering sound negative or anything but increasing leverage to buy back stock to enhance EPS growth is definitely a corporate finance / engineering strategy. I like seeing dividend + div % growth and some share buybacks but that can’t be a recurring 30% of your EPS growth strategy, that’s just crazy and is definitly not a way to stay relevant in an industry that is changing constantly.
The shareholder sentiment is an issue that has only recently (as far as I can tell) risen as a result of poor stock performance and poor EPS gains. Revenue has been flat for years and the recent lack of EPS growth and poor stock performance coincide directly with less share repurchases. I think my intial point was IBM extensive debt-financed stock repurchase plan has ran out of steam and the stock price is back in the mode of “what is actually growing at IBM?” is becoming vastly more improtant than intermediate shareholder preseants. I think we’ll see 2010 IBM stock price (before their $20 EPS 2015 goal) before new highs unfortnately; I might just have convinced myself to be short. 0_0
^ Agreed. I don’t really know this company all that well, but put a gun to my head and make me play it and I’d short it down to ~$125/share (apparent long-term support?). Not a chartist or a tech guy, so I’ll stay out of it but that’d be my play.
on capital allocation, this is my opinion.
assuming sufficient cash in bs and debt aint crazy here is what they should do:
high roi, invest in capex, acquisitions. capex if project roi is greater than acquisition roi.
low roi, dividends or buybacks. dividends if market return is greater than stock return.
if company buys back, then you as an investor should sell your shares to maintain your exposure to company prospects.
if they take on debt. they are taking on more risk. so unless their returns on what they borrow are higher then sell shares.
I would be long IBM above 150.00 and think it goes much higher
The sentiment on IBM is very bearish right now. Anyone who is bearish IBM has already sold. So who is left to sell and push this thing further down?
IBM has been in business for over 100 years. That is a trend that I don’t want to bet against.
Also, no one has mentioned WATSON. My prediction is that WATSON will catapult IBM back to technology leader/innovator status.