Gurus
It was a busy quarter for IBM (IBM, Financial) when it comes to guru purchases. Warren Buffett (Trades, Portfolio) continued to add to his IBM position and now owns 8.35% of the company. Also, Edward Lampert, Bruce Berkowitz (Trades, Portfolio), and Tweedy Browne (Trades, Portfolio) all made sizeable initial investments in the company this past quarter. According to GuruFocus, Lampert took a 0.05% position, Berkowitz has 0.08% and Tweedy Browne (Trades, Portfolio) holds 0.03%.
Valuation
IBM continues to trade at very cheap levels. Over the last two years, the company has traded down from a high of $198.24 on April 14, 2014 to the current price of $133.71 as of Nov. 16. The dividend yield has increased and is now nearing 4%. According to Morningstar, the company has generated $14.38 in diluted EPS over the last 12 months, which means it is trading below a 10x P/E multiple.
Brief thesis
IBM's legacy businesses continue to decline, while newer business lines are growing. The company has also shed several businesses that were struggling and is focusing on more profitable and growing business lines. They continue to spend money on R&D and acquisitions to build their capabilities.
In healthcare, IBM is using Watson in conjunction with several acquisitions (Merge Healthcare, Phytel, Explorys) to provide a strong data and analytics platform. They have purchased The Weather Company in order to use their data with Watson, which will provide analytics to several industries including insurance. IBM is also partnering with numerous companies including Apple (AAPL, Financial), Twitter (TWTR, Financial), Box, ARM Holdings, Medtronics (MDT, Financial) and Johnson & Johnson (JNJ, Financial), along with being involved with OpenPOWER to continue to push their products and services. Several years from now, their nanotube technology could be used to replace silicon based CPU's in smartphones, tablets and computers.
Conclusion
Overall the company must combat sales declines in its legacy business, but IBM continues to generate high margins and has several business lines that have and could continue to generate strong revenue growth. The company has continued to trade down, which has provided several gurus with the opportunity to buy at lower prices.
