Buffett’s IBM purchase history:
The financial report causing the sell-off yesterday showed revenue down 4% quarter over quarter to $23.7 billion, marking the company’s third quarter this year of revenue decline.
The greatest decline occurred in its systems and technology segment, down 17%, and growth markets, down 9% and trailing major markets for the first time. Major markets improved by almost two points sequentially, making it the best performance for the markets since the first quarter of 2012, even with China down 22%.
All other segments saw at least modest increases, with Smarter Planet revenue up more than 20% year to date, and cloud revenue up more than 70% year to date, exceeding $1 billion for the first time, and helped by a major acquisition of SoftLayer in July.
Services, its largest segment, saw revenue fall 3% to $9.5 billion. Software, its second largest, saw revenue increase 1%.
The company also reported a 6% increase in net income to $4 billion, helped by expanded gross and net operating margins, and maintained full-year EPS guidance of $16.90 – excluding a second-quarter workforce rebalancing charge – that it projected in the first quarter.
“Clearly we need to improve performance, predominantly in the growth markets. And keep in mind that we’re dealing with a couple of substantial headwinds. We absorbed a significant impact from currency in these results and are affected by the pause during the development of China’s new economic plans,” IBM vice president and CFO Mark Loughridge said in the company’s third quarter conference call.
When Buffett, chairman and CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) announced that he bought IBM after avoiding the technology sector for almost his entire career, he listed several reasons. The first was the skill of management.
Second on the list was its ability to consistently meet its five-year goals, the next of which is set for 2015.
Buffett in November 2011 told CNBC: “I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job."
Third-quarter results placed it on its way to meet most of its 2015 aims. Despite the revenue declines, IBM said in its third quarter conference call it is still confident in its ability to reach its goal of at least $20 in operating EPS by 2015. It also returned another $11 billion to shareholders in the first three quarters of the year through dividends and repurchases, on its way to its 2015 goal of $70 billion. Buffett praised the company’s share repurchase policy on CNBC during his holding announcement, saying, “If they get it down to where there's 64 million shares outstanding, I'll be very happy.”
Another goal – for growth markets to approach 30% of geographic revenue – hangs in the balance as revenues for the countries declined 9%. Yet the company appears confident it can turn that around.
“As far as the growth markets are concerned, we will be dealing with the China impact for another couple of quarters. More broadly in growth markets, we are taking management actions to improve execution, and are confident we can get it back on track and improve our performance starting in the fourth quarter, driving to mid-single digit performance in growth markets in 2014,” Loughridge said.
Analysis shows that IBM has also been issuing new debt of more than $7.7 billion over the past three years, and has a PB ratio of 11.52, close to a 10-year high. Its P/E, on the other hand, has fallen to a three-year low at 13.4.
In the end, Buffett appeared to hold a balanced view of the company’s pros and cons, saying at his 2013 Berkshire shareholder meeting:
“I don’t understand the moat around IBM (IBM) as much as around Coca-Cola (KO). I have some understanding of it but would have more conviction about the moat around Coke or Wrigley or Heinz than IBM, but I feel good enough about IBM that I put money in it and nothing precludes Microsoft (NASDAQ:MSFT) and IBM both being successful. In fact I hope both are. We have enough conviction about IBM’s position. I like their financial position. Odds are good. I don’t feel the same degree of conviction about that than BNSF railroad. I can’t think of anything going wrong with BNSF. I can think of some things wrong with IBM. They have a huge pension fund too. Asset and liabilities – a big annuity company on the side. They can have balls that take 20 bounces in annuities. I would rather they didn’t have it but the fact is they do. They show assets and liabilities equal, but assets are more reliable over time.”
For more Buffett stocks, visit his portfolio. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Warren Buffett.
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