International Business Machines Corp. (IBM) Buffett Stock Flirting with 52-Week Lows

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IBM

International Business Machines Corp. (NYSE:IBM) has had a tough 2014 with the stock declining almost 19 percent excluding dividends year to date. The information technology company which operates in five segments: Global Technology Services (GTS), Global Business Services (GBS), Software, Systems and Technology and Global Financing, has seen weakness in its Systems and Technologies and stagnation in Software while more immature businesses like Business Analytics and Cloud are promising but not large enough to offset difficulties in the former.

IBM Stock 2014

In awareness of this fact, IBM ditched its 2015 Road Map and 2015 Operating EPS Goal, setting off the stock’s current decline to new 52 week lows. Despite the difficulties Wall Street Analysts are expecting the company to produce earnings per share of $16.86 or over $17 billion in earnings in 2015. In its last reported quarter, the company’s cloud division delivered revenue growth year over year of 50%, Business Analytics +8%, Mobile +10%, and Security +20% all showing promise going forward.

Warren Buffett has made IBM one of his largest positions

Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) owns over 70.5 million shares of IBM placing it in their top 5 holdings. When Buffett originally acquired IBM in 2011, he touted the superb job IBM has done reinventing itself from near bankruptcy 20 years ago to prominence and their brilliance with financial management.

He said he could “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.” Buffett almost prophetically discussed why he didn’t mind if IBM languished.

Back in 2011: Why Buffett didn’t mind if IBM’s stock languished

From the 2011 Berkshire Hathaway Letter to Shareholders:

Available Here: Here

“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 $1.5 billion more than if the “high-price” repurchase scenario had taken place.

Stock Near 52-Week Lows, Discount to Buffett Cost-basis

International Business Machines. (NYSE:IBM) is currently trading near $152 per share (12/17 close), which represents a discount to Buffett’s original cost basis of $170 and provides an interesting opportunity for further analysis.

Detractors will argue that IBM has intense competition, has shown an inability to grow top line revenue, and  has only generated earnings per share growth through financial engineering. They would also argue that Buffett has extended past his own circle of competency with IBM and that the company faces challenges adapting to the cloud world. They’d point to those same questions and wonder if IBM will earn $20 billion in the fifth year Buffett talks about (2016).

3 years in, Buffett has gotten his wish and the stock has languished. IBM has also repurchased over $37 billion in shares (2012 to 2014 YTD) of the $50 billion he predicted. Now all eyes are on the Cloud and the future for IBM.

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