International Business Machine Corporation (IBM, Financial) is one of the companies that Warren Buffett (Trades, Portfolio) holds in his portfolio that is currently seeing quotional losses. It is rare for Warren Buffett (Trades, Portfolio) to invest in a tech company; he has always avoided tech companies, but IBM is different than of tech companies. It been around since 1911 has management in place that are good at capital allocation, has above average on investment capital, strong financials, high profit margins and has a large share repurchase program in place. These are clearly the reasons that Buffett in 2011, acquired his stake in IBM. Currently the company's stock price is lower than when Buffett bought his stake, and he owns 6.5% of the company.
In an interview with CNBC Warren Buffett (Trades, Portfolio) said, "The other thing I would say about IBM, too, is that a few years back they had 240 million options outstanding; now they are down to about 30 million. They treat their stock with reverence, which I find is unusual among big companies. Or they really ... they really are thinking about the shareholder."
The company is clearly undervalued and offering any investor a change to buy shares at a lower price then Buffett.
Business operates in five segments
- Global Technology Services (GTS).
- Global Business Services (GBS).
- Software, Systems and Technology.
- Global Finances.
- GTS primarily provides IT infrastructure services and Business Process Services.
IBM manufactures and markets computer hardware and software, offers infrastructure, hosting and consulting services. The company is involve in cloud computing which is now underpressure from more competition from the likes of Amazon (AMZN, Financial)Â and others.
Financial
For the nine months ending in Septmember 30, 2014, the firm revenues decreased 3% to $68.88 billion. Net income applicable to common stockholders excluding extraordiary, items decreased 4% to $10.24 billion. Revenues from System and Technology segment decreased of 13% to $5.77 billion. Global Technology Services segment decreased 2% to $18.63 billion. Asian Pacific segment decreased 9% to $10.36 billion and the Amercan segment decreased 1% to $20.72 billion.
Balance Sheet
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Current Assets | 51350 | 49433 | 50928 | 48116 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 126223 | 119213 | 116433 | 113450 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Current Liabilities | 40154 | 43625 | 42126 | 40562 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 103431 | 100353 | 96297 | 90404 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Equity | 22792 | 18860 | 20138 | 23046 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities & Shareholders' Equity | 126223 | 119213 | 116435 | 113450 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 1054.39 | 1117.37 | 1163.18 | 1227.99 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Income Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Revenue | 99751 | 104507 | 106916 | 99870 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||
| Cost of Revenue, Total | 51246 | 54209 | 56778 | 53857 | ||||||||||||||||||||||||||||||
| Gross Profit | 48505 | 50298 | 50138 | 46013 | ||||||||||||||||||||||||||||||
| Total Operating Expenses | 80227 | 82606 | 85913 | 80147 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||
| Operating Income | 19524 | 21901 | 21003 | 19723 | ||||||||||||||||||||||||||||||
| Interest Income (Expense), Net Non-Operating | - | - | - | - | ||||||||||||||||||||||||||||||
| Gain (Loss) on Sale of Assets | - | - | - | - | ||||||||||||||||||||||||||||||
| Other, Net | - | 1 | - | - | ||||||||||||||||||||||||||||||
| Net Income Before Taxes | 19524 | 21902 | 21003 | 19723 | ||||||||||||||||||||||||||||||
| Provision for Income Taxes | 3041 | 5298 | 5148 | 4890 | ||||||||||||||||||||||||||||||
| Net Income After Taxes | 16483 | 16604 | 15855 | 14833 | ||||||||||||||||||||||||||||||
| Minority Interest | - | - | - | - | ||||||||||||||||||||||||||||||
| Equity In Affiliates | - | - | - | - | ||||||||||||||||||||||||||||||
| U.S GAAP Adjustment | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Income Before Extraordinary Items | 16483 | 16604 | 15855 | 14833 | ||||||||||||||||||||||||||||||
| Total Extraordinary Items | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Income | 16483 | 16604 | 15855 | 14833 | ||||||||||||||||||||||||||||||
| Total Adjustments to Net Income | - | - | - | - | ||||||||||||||||||||||||||||||
| Income Available to Common Excluding Extraordinary Items | 16483 | 16604 | 15855 | 14833 | ||||||||||||||||||||||||||||||
| Dilution Adjustment | -1 | -1 | - | - | ||||||||||||||||||||||||||||||
| Diluted Net Income | 16482 | 16603 | 15855 | 14833 | ||||||||||||||||||||||||||||||
| Diluted Weighted Average Shares | 1103.04 | 1155.45 | 1213.77 | 1287.36 | ||||||||||||||||||||||||||||||
| Diluted EPS Excluding Extraordinary Items | 14.94 | 14.37 | 13.06 | 11.52 | ||||||||||||||||||||||||||||||
| DPS - Common Stock Primary Issue | 3.7 | 3.3 | 2.9 | 2.5 | ||||||||||||||||||||||||||||||
| Diluted Normalized EPS | 15.43 | 14.54 | 13.83 | 11.9 | ||||||||||||||||||||||||||||||
Valuation
IBM over the last decade has been able to consistently earn high returns on investment capital and return on equity far above the average for tech companies and other businesses. The company currently has an earning yield of 8.8% which is far greater then the return offered by Treasuries. The company as well has a owner earnings yield of 11.97% and a pretax earnings yield of 10.74% which shows that the IBM is offering long-term investors at least a 10% return on their investment in the firm. IBM is selling at about 11.2x its earnings, selling for about 8.5x its owner earnings, and 9.3x its pretax earnings. Clearly the company is selling at a discount to other large establish tech companies like Microsoft (MSFT, Financial). The company is selling sells then 15x its average earnings over the last 10 years.
IBM compared to Microsoft
Chart above show the difference in both Microsoft and IBM. IBM has a higher earnings yield, return on equity and capital than Microsoft. IBM clearly earns more than Microsoft but sells for less; IBM is selling for 11.2x earnings and while Microsoft sells for 19x its earnings. As well Microsoft sells for 14.8x its owner earnings and 15.3x its pretax earnings. Microsoft has an earnings yield of 8%, owner earnings yield of 7.2% and a pretax earnings yield of 6.4%. Based on earnings and yield clearly Microsoft isn't cheap like IBM who sells for sells and has higher earnings yields then Microsoft.
IBM Multiples and Earnings
- Owner Earnings of $19.66
- Sells for 8.5x Owner Earnings
- Pretax Earnings of $17.70
- Sells for 9.3x Pretax Earnings
- Average 10 years earnings of $15.60
- Sells for 10.5x its 10 years average years.
IBM Valuation
- Selling for 10x Owners Earnings $196.60
- Selling at 10x Pretax Earnings $177.00
- Selling at 15x 10 year Average Earnings $234
What IBM Is Yielding
- Owner Earnings Yield of 11.97%
- Pretax Earnings Yield of 10.74%
- Earnings Yield of 8.8%
IBM has a value range of $177 to $234 per share with a average earnings yield of at least 10%. The company like IBM is a great investment an is selling for less then when Warren Buffett (Trades, Portfolio) bought his stake and offers great long-term value for investors. The market is currently undervaluing IBM and mispricing its, which gives any smart investor a chance to make money off the stupidity of the market crowd.
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