GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

IBM: A Good Company at a Fair Price?

insider

gurufocus

341 followers
Warren Buffett revealed on CNBC and then in his portfolio report that he has bought $10.7 billion of IBM shares, or 5.6% of the company for Berkshire Hathaway (BRK.A)(BRK.B). The reports show that Berkshire started to buy IBM in the first quarter of this year, and has been adding to the position throughout the year.

We all know that Warren Buffett likes to buy companies with predictable and proven earnings, protected by a moat, sold at reasonable prices, managed by capable people and in businesses he understands. Considering IBM is the first major purchase Buffett ever made in the tech sector, what does he like about IBM?

Predictable and Proven Earnings:

IBM did display very predictable revenue and earnings growth over the past decade. GuruFocus has rated IBM a predictability rank of 2-star. This can be seen from the 10-year financial page of IBM. The revenue and earnings growth charts are below:

1125906966.jpg

1467503058.jpg

Does IBM Have Moat?

“Moat” is one of the important factors that Buffett considers when he wants to buy a company for the long term. About IBM’s moat, this is what he said in an interview: “It's a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms… There is a lot of continuity to it."

IBM’s moat is also clearly displayed in its expansion of profit margin, which GuruFocus believes is the most important indication of a business’ moat. Below is the operating margin of IBM, as displayed in IBM’s 10-year financial page:

1098391036.jpg

Over the past decade, IBM was able to expand its operating margin from around 10% to its current 18%. That is a growth of 7% a year in margin expansion. Because of the margin expansion, IBM was able to grow its earnings by 16% a year over the past 10 years, while its revenue only grew 6% a year.

Profit margin expansion is the best thing you can expect from a business. Think Apple (AAPL). GuruFocus will develop a screener for companies that can expand their profit margins.

Managed by Capable People?

Profit margin expansion is also an indication that the management of the company is doing things right. Buffett thinks IBM has done an "incredible job" executing its long-term strategy, has an excellent "road map" for the future, and "respects" its shareholders by being honest with them and doing big stock buybacks. "They've done all kinds of things right." He also gives a lot of credit to former CEO Lou Gerstner, and wishes he'd bought the stock back when Gerstner was running the company.

A Business He Understands?

Probably not.

Buffett is certainly looking at the past performance of the business to predict the future. While past performance maybe not the best indicator for the future, what is?

Sold at Reasonable Prices?

At a P/E of around 14, IBM isn’t cheap. It is probably fair valued. Companies such as Intel (INTC) and Microsoft (MSFT) are certainly cheaper. IBM’s stock prices have gained more than 120% since 2005, when Buffett was saying “I have an elephant gun, but cannot not find elephant.” Apparently Buffett missed this elephant when it was much cheaper.

The IBM purchase of Buffett looks similar to his purchase of Burlington Northern. He started to buy Burlington Northern after its stock prices had tripled in the previous three years. But he likes the company now. Price doesn’t seem to be an issue as long as it is reasonable.

1735990344.jpg

This is probably another of Buffett’s purchases of “good companies at fair prices.” Unlike with Burlington Northern, Berkshire isn’t going to take over IBM. It is a too big an elephant to swallow.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.4/5 (19 votes)

Comments

dealraker
Dealraker - 2 years ago
"A business he understands" Probably not."

You, dear writer, are either stupid or you wrote the article in haste. Even I understand IBM.
valueradar
Valueradar - 2 years ago


Dealraker,

you are certainly smarter than Warren Buffett.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK