Warren Buffett has disclosed in the last quarterly filling that he bought a 5.4% stake in IBM plus other quality companies, such as DirecTV Inc. (DTV, Financial), Visa Inc. (V, Financial), Intel Corp. (INTC, Financial) and General Dynamics Corp. (GD, Financial).
Mr Buffett's Berkshire Hathaway (BRK.A)(BRK.B) fund started buying shares in the firm in March, eventually spending around $10.7 billion.
The billionaire had steered away from technology firms in the past.
However, he said that he had been impressed by IBM's road map for how it planned to attract IT firms outside the U.S. to sign up to its services. I think Warren's new investment in tech will open the land for more tech companies in his portfolio, maybe Samsung or Sony.
He said he started buying the stock after he read IBM's 2010 annual report and spoke to technology professionals in the businesses his fund had already invested in. Warren Buffet saw a strong brand moat and a super-diversified, low capital intensive IT business.
He said he realized there was a lot of "continuity" in the U.S.-headquartered business.
Mr. Buffett said he had not told IBM's chief executive, Sam Palmisano, about the investment before announcing it on TV.
Mr. Buffett noted that even though he likes the company's fundamentals, he would never buy stock in Microsoft because of his friendship with the company's founder and chairman, Bill Gates.
I think that Buffett is looking for a business that will have double-digit bottom-line growth and will be stable even in recessionary times. That also is true with his other new buys during the quarter: Intel, Visa, CVS and DirecTV. He is very attracted to predictable businesses, strong and established franchises that operate mainly in all parts of the world (there are some exceptions to this, CVS and Wells Fargo).
I will comment on his latest buys:
IBM (IBM, Financial): IBM has a forward P/E of 12.62 compared to the S&P's historical average of 15.9. This analysis is fine for average stocks, but IBM is far from average. It is one of the best stocks (companies) of all time. From 1950 to 2003 IBM had annual growth rates of 11% and commanded an average P/E ratio of 26.76. Today IBM has an IT service business that is impossible to duplicate giving owners an impenetrable economic moat that Warren Buffett so covets. So, Buffett paid about 12 times earnings for IBM, a company growing at nearly 10% per year. They have consistently raised their dividend and have a large stock buyback program that has reduced shares outstanding by over 30% during the last 10 years. As Buffett pointed out, the company’s business is growing at double-digit rates in over 40 countries and has plenty of room for growth in emerging markets. Obviously, the company will be affected if the global economy falls back into recession or something worse but like Buffett, I am fairly optimistic about the long-term future of a world that continues to trend toward more freedom.
Intel (INTC): Although it is highly unlikely that Buffett would ever buy shares of Microsoft, given his close relationship with Bill Gates, which would potentially raise questions about "inside information or something" if Buffett were to own the stock personally or buy it on Berkshire's behalf, he is apparently not averse to following some of Gates' advice when it comes to investing in technology (even if it took him some 20 years to act on it). As the story goes, when Buffett and Gates first met in the summer of 1991, the software tycoon told the Oracle of Omaha to buy Intel and Microsoft in response to Buffett's question about the future of IBM. I think Buffett was impressed with Intel's positioning as the largest semiconductor firm in the world, with a dominant position in the PC microprocessor market. Berkshire is buying into the future growth of one of the established leaders in the technology industry, which, while hardly cutting edge, is a big step forward for a man who for years has avoided the sector because, in his view, it was too difficult to predict which technology firms would actually prosper in the long run. INTC shares are currently trading around $23.75. Its last 12-month earnings per share of $2.31 places its shares on a trailing price to earnings ratio of 10.28. This compares with the sector average of 13.38. With earnings expected to be in the region of $2.56 for the year ending December 2012, its forward price to earnings ratio slips to 9.27. For a company that produces an operating margin of 32.77%, and with a return on equity of over 27%, this rating should look attractive to potential investors.
Visa (V): Despite holding a rather substantial stake in American Express (which at close to $7 billion accounted for more than 11% of Berkshire's total stock holdings at the end of the third quarter), the insurer has been picking up shares in both MasterCard and Visa this year. Both holdings can be traced back to Todd Combs, who had invested heavily in MasterCard in his own portfolio at Castle Point Capital Management. While Combs started building his stake in MasterCard during the first quarter of 2011, it looks like he went all in with Visa in the third quarter, picking up slightly more than 2 million shares (which were worth around $200 million at the end of the third quarter). Visa operates the world's largest credit and debit card networks in terms of cards outstanding and purchase volume, and that with few direct competitors, the firm has unmatched scale in this market and a wide economic moat. No doubt it was this positioning in the marketplace along with the growth that is expected to come from electronic payments longer term that got Combs interested in the stock in the first place.
CVS (CVS, Financial): CVS made a bold move in 2007 to acquire Caremark Rx, a pharmacy benefit manager. This acquisition was of clear benefit to CVS' retail stores, which gained unprecedented leverage over suppliers and meaningful revenue synergies. However, so far the acquisition has destroyed more value in the PBM than it created on the retail side. CVS Caremark has struggled to sell its integrated value proposition to PBM customers, resulting in declining operating profit even as competitors experience rapid growth.
I think Buffett or Combs analyzed some benefits from the CVS-Caremark merger. The company now either dispenses or manages more than 1 billion prescriptions, giving it unmatched bargaining power when negotiating with suppliers. Through the Maintenance Choice program — which allows Caremark's PBM members to fill 90-day prescriptions in CVS stores for the same reduced copay as mail order — CVS has increased its retail market share and consistently beat Walgreen's same-store sales growth since the merger.
DirecTV (DTV): While the firm has had some success over the last couple of years generating growth in excess of the industry overall, I believe that DirecTV will face tough challenges over the next several years as the pay-television industry matures and turns increasingly more competitive. My feeling is that the ability to combine phone with high-speed Internet access and television service gives cable a major weapon in its fight with satellite providers like DirecTV, and he also notes that the phone companies are building a similar advantage as they upgrade networks around the country. With so many choices for the consumer, and DirecTV's equipment subsidies and marketing spending coming in around $800 for each customer acquired (which easily takes upward of 18 months for the firm to recoup), the road ahead looks far more challenging.
General Dynamics (GD): Dogged by concerns about drastic cuts in defense spending (in the aftermath of the debt ceiling debate and resolution), the shares dropped close to 25% during the third quarter, with Berkshire picking up more than 3 million shares (which were worth around $175 million at the end of September). In my view, General Dynamics' products form the backbone of U.S. defense superiority. While this makes the firm extremely vulnerable to future cuts in defense spending, I believe that General Dynamics' entrenched product range, robust aerospace business, and focused acquisitions should allow the company to produce returns on invested capital well above its cost of capital for years to come.
Mr Buffett's Berkshire Hathaway (BRK.A)(BRK.B) fund started buying shares in the firm in March, eventually spending around $10.7 billion.
The billionaire had steered away from technology firms in the past.
However, he said that he had been impressed by IBM's road map for how it planned to attract IT firms outside the U.S. to sign up to its services. I think Warren's new investment in tech will open the land for more tech companies in his portfolio, maybe Samsung or Sony.
He said he started buying the stock after he read IBM's 2010 annual report and spoke to technology professionals in the businesses his fund had already invested in. Warren Buffet saw a strong brand moat and a super-diversified, low capital intensive IT business.
He said he realized there was a lot of "continuity" in the U.S.-headquartered business.
Mr. Buffett said he had not told IBM's chief executive, Sam Palmisano, about the investment before announcing it on TV.
Mr. Buffett noted that even though he likes the company's fundamentals, he would never buy stock in Microsoft because of his friendship with the company's founder and chairman, Bill Gates.
I think that Buffett is looking for a business that will have double-digit bottom-line growth and will be stable even in recessionary times. That also is true with his other new buys during the quarter: Intel, Visa, CVS and DirecTV. He is very attracted to predictable businesses, strong and established franchises that operate mainly in all parts of the world (there are some exceptions to this, CVS and Wells Fargo).
I will comment on his latest buys:
IBM (IBM, Financial): IBM has a forward P/E of 12.62 compared to the S&P's historical average of 15.9. This analysis is fine for average stocks, but IBM is far from average. It is one of the best stocks (companies) of all time. From 1950 to 2003 IBM had annual growth rates of 11% and commanded an average P/E ratio of 26.76. Today IBM has an IT service business that is impossible to duplicate giving owners an impenetrable economic moat that Warren Buffett so covets. So, Buffett paid about 12 times earnings for IBM, a company growing at nearly 10% per year. They have consistently raised their dividend and have a large stock buyback program that has reduced shares outstanding by over 30% during the last 10 years. As Buffett pointed out, the company’s business is growing at double-digit rates in over 40 countries and has plenty of room for growth in emerging markets. Obviously, the company will be affected if the global economy falls back into recession or something worse but like Buffett, I am fairly optimistic about the long-term future of a world that continues to trend toward more freedom.
Intel (INTC): Although it is highly unlikely that Buffett would ever buy shares of Microsoft, given his close relationship with Bill Gates, which would potentially raise questions about "inside information or something" if Buffett were to own the stock personally or buy it on Berkshire's behalf, he is apparently not averse to following some of Gates' advice when it comes to investing in technology (even if it took him some 20 years to act on it). As the story goes, when Buffett and Gates first met in the summer of 1991, the software tycoon told the Oracle of Omaha to buy Intel and Microsoft in response to Buffett's question about the future of IBM. I think Buffett was impressed with Intel's positioning as the largest semiconductor firm in the world, with a dominant position in the PC microprocessor market. Berkshire is buying into the future growth of one of the established leaders in the technology industry, which, while hardly cutting edge, is a big step forward for a man who for years has avoided the sector because, in his view, it was too difficult to predict which technology firms would actually prosper in the long run. INTC shares are currently trading around $23.75. Its last 12-month earnings per share of $2.31 places its shares on a trailing price to earnings ratio of 10.28. This compares with the sector average of 13.38. With earnings expected to be in the region of $2.56 for the year ending December 2012, its forward price to earnings ratio slips to 9.27. For a company that produces an operating margin of 32.77%, and with a return on equity of over 27%, this rating should look attractive to potential investors.
Visa (V): Despite holding a rather substantial stake in American Express (which at close to $7 billion accounted for more than 11% of Berkshire's total stock holdings at the end of the third quarter), the insurer has been picking up shares in both MasterCard and Visa this year. Both holdings can be traced back to Todd Combs, who had invested heavily in MasterCard in his own portfolio at Castle Point Capital Management. While Combs started building his stake in MasterCard during the first quarter of 2011, it looks like he went all in with Visa in the third quarter, picking up slightly more than 2 million shares (which were worth around $200 million at the end of the third quarter). Visa operates the world's largest credit and debit card networks in terms of cards outstanding and purchase volume, and that with few direct competitors, the firm has unmatched scale in this market and a wide economic moat. No doubt it was this positioning in the marketplace along with the growth that is expected to come from electronic payments longer term that got Combs interested in the stock in the first place.
CVS (CVS, Financial): CVS made a bold move in 2007 to acquire Caremark Rx, a pharmacy benefit manager. This acquisition was of clear benefit to CVS' retail stores, which gained unprecedented leverage over suppliers and meaningful revenue synergies. However, so far the acquisition has destroyed more value in the PBM than it created on the retail side. CVS Caremark has struggled to sell its integrated value proposition to PBM customers, resulting in declining operating profit even as competitors experience rapid growth.
I think Buffett or Combs analyzed some benefits from the CVS-Caremark merger. The company now either dispenses or manages more than 1 billion prescriptions, giving it unmatched bargaining power when negotiating with suppliers. Through the Maintenance Choice program — which allows Caremark's PBM members to fill 90-day prescriptions in CVS stores for the same reduced copay as mail order — CVS has increased its retail market share and consistently beat Walgreen's same-store sales growth since the merger.
DirecTV (DTV): While the firm has had some success over the last couple of years generating growth in excess of the industry overall, I believe that DirecTV will face tough challenges over the next several years as the pay-television industry matures and turns increasingly more competitive. My feeling is that the ability to combine phone with high-speed Internet access and television service gives cable a major weapon in its fight with satellite providers like DirecTV, and he also notes that the phone companies are building a similar advantage as they upgrade networks around the country. With so many choices for the consumer, and DirecTV's equipment subsidies and marketing spending coming in around $800 for each customer acquired (which easily takes upward of 18 months for the firm to recoup), the road ahead looks far more challenging.
General Dynamics (GD): Dogged by concerns about drastic cuts in defense spending (in the aftermath of the debt ceiling debate and resolution), the shares dropped close to 25% during the third quarter, with Berkshire picking up more than 3 million shares (which were worth around $175 million at the end of September). In my view, General Dynamics' products form the backbone of U.S. defense superiority. While this makes the firm extremely vulnerable to future cuts in defense spending, I believe that General Dynamics' entrenched product range, robust aerospace business, and focused acquisitions should allow the company to produce returns on invested capital well above its cost of capital for years to come.
