International Business Machines

International Business Machines

IBM (NYSE)

Website: www.ibm.com

Sector:  Information Technology
Beta Coefficient: 0.63
10 Yr Compound EPS Growth:  13.0%
10 Yr Compound DPS Growth: 19.5%

Dividend raises, past 10 years: 10 times.


Financial Result Year 2014

Revenues (b)     92.8
Net Income (b)   15.7
EPS  15.59
DPS   4.25
Cash flow per share 20.44

Current yield 2.7%

High Price  199.2  P/E 12.8    DY 2.1%
Low Price   150.5  P/E  9.7     DY 2.8%

IBM historically has made a broad range of computers, mainframes, and network servers.  

But the company has morphed over the years into a software and services company.

As a consequence, fewer folks than ever talk about an "IBM computer" anymore; they talk about an "IBM business solution" or some such.

IBM is divided into four principal business units and a financing unit:

• The Global Technology Services unit:  This is the largest, at 38% of revenues.
• The Global Business Services unit (18%)
• The Software unit (32%).
• The Systems and Technology group (10%)
• The Financing Unit (2%) helps the company market it all.

Overseas sales make up about 55% of revenues.

The company has kept "strategic" large systems but little else; it is now offering cloud-based and integrated hardware/software/service solutions for diverse needs such as business analytics and data security.

It recently invested $4 billion in "new" core strategic areas in cloud and mobile computing, analytics and information security.

It is buying up its own stock, almost 6% of its float last year.

Its business mix is shifting from less profitable hardware to more profitable services, first came consulting, then outsourcing and now, leading-edge analytics, security and cloud services.

Investor's Checklist: Technology Software

The software industry has economics few industries can match.  Successful companies should have excellent growth prospects, expanding profit margins, and pristine financial health.

Companies with wide moats are more likely to produce above-average returns.  But superior technology is one of the least sustainable competitive advantages in the software industry.

Look for software companies that have maintained good economics throughout multiple business cycles.  We prefer companies that have been around at least several years.

License revenue is one of the best indicators of current demand because it represents how much new software was sold at a given time.  Watch for any license revenue trends.

Rising days sales outstanding (DSOs) may indicate a company has extended easier credit terms to customers to close deals.  This steals revenues from future quarters and may lead to revenue shortfalls.

If deferred revenue growth slows or the deferred revenue balance begins to decline, it may signal that the company's business has started to slow down.

The pace of change makes it tough to predict what software companies will look like in the future.  For this reason, it's best to look for a big discount to intrinsic value before buying.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Why Warren Buffett likes IBM?

Finally, we made two major investments in marketable securities:

• (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
• (2) 63.9 million shares of IBM that cost us $10.9 billion. (= $170.58 per share)

Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.)

This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices. When Berkshire buys stock in a company that is repurchasing shares, we hope for two events:

• First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and 
• second, we also hope that the stock underperforms in the market for a long time as well. 

A corollary to this second point: “Talking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today.

• Their operational accomplishments were truly extraordinary. 
• But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. 

Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.

• The company has used debt wisely, 
• made value-adding acquisitions almost exclusively for cash and 
• aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.

• Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.
• Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. 

Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?
I won’t keep you in suspense.

• We should wish for IBM’s stock price to languish throughout the five years.

Let’s do the math.

• If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. 
• If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million#  greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. *At some later point our shares would be worth perhaps $1 1⁄2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares),

• you are hurt when stocks rise. 
• You benefit when stocks swoon. Emotions, however, too often complicate the matter: 

Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order:

• In my early days I, too, rejoiced when the market rose. 
• Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. 
• Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings.

• But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. 
• And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

#   If IBM were to earn, say, $20 billion in the fifth year,  Berkshire's share of profits in the 2 scenarios are as follows:

• 7% of $20 billion = $1.4 billion
• 6.5% of $20 billion = $1.3 billion.
• The difference due to the sharebuyback at lower prices give an extra $100 million in profit.

*At some later point our shares would be worth perhaps $1 1⁄2 billion more than if the “high-price” repurchase scenario had taken place.

I am having difficulty understanding how Warren Buffett derived this $1 1/2 billion figure.   Perhaps, my readers can help me here.   Thanks. 

The Company when It's Old (2): Alcoa, GM & IBM

There's a lesson here that may save you some grief in the future.  No matter how powerful it may be today, a company won't stay on top forever.  Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.

Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.

International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar.  Johns-Manville, once number one in insulation and building supplies, topped out in 1971. 

The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.

General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years.  Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable.  Sometime in the 1960s, its reflexes began to slow.

The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas.  The attack was aimed directly at Detroit and GM was slow to react.  A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.

It continued to make big cars when it could see that small foreign cars were selling like crazy.  Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories.  This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.

For three decades the largest industrial company in the US has not been largely profitable.  Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you.  People would sooner have believed that Elvis was lip-synching.

Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline.  Since the early 1950s, IBM was a spectacular performer and a great stock to own.  It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle.  The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations.  As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.

The stock was recommended by stockbrokers everywhere as the bluest of the blue chips.  To mutual fund managers, IBM was a "must" investment.  You had to be a maverick not to own IBM.

But the same thing happened to IBM that happened to GM.  Investors were so impressed with its past performance that they did not notice what was going on in the present.  People stopped buying the big mainframe computers that wer the core of IBM;s business.  The mainframe market wasn't growing anymore.  IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product.  IBM's earnings sank, and as you probably can guess by now, so did the stock price.

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel?