When Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) released its second-quarter earnings Friday, it acknowledged that in spite of some sequential improvements, its sinking stake in IBM (IBM, Financial) weighed heavily on its investing results.
For the quarter, Buffett reported a fourth consecutive period of year-over year net earnings growth, at $5.0 billion versus $4.01 billion, and revenue at $54.5 billion from $51.4 billion, which did not reflect the state of his equity portfolio. There, he posted $47.6 billion in unrealized gains, compared to $62.3 billion at Dec. 31, and unrealized losses of $2.3 billion, compared to unrealized losses of $3.3 billion. Buffett, who has famously quipped that his favorite holding time is “forever,” said he was untroubled by the downturn in his portfolio.
“We concluded that the unrealized losses shown in the tables above were temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of the issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that market prices will increase to and exceed our cost,” he said.
“As of June 30, 2016 and December 31, 2015, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $908 million and $989 million, respectively.”
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Because they compose approximately 61% of the portfolio, Buffett was speaking primarily about his top four positions: American Express (AXP, Financial), Wells Fargo (WFC, Financial), IBM (IBM, Financial) and Coca-Cola (KO, Financial). Each of the behemoths has also returned from 13% to 110% over the past decade, and though Wells Fargo and American Express’ stock each fell about 13% for the first half, Coca-Cola gained 5.5% and IBM 10%.
Buffett added a special note on IBM, his newest investment of the bunch. He started buying IBM’s stock in the second quarter 2011, and as of second quarter-end, through numerous purchases, had acquired 8.5% of the company, worth 9.6% of his entire portfolio. But from June 30, 2011, to June 30, 2016, IBM’s price had sunk almost 13%, though he confirmed he had no intention of selling any shares.
“Unrealized losses at June 30, 2016 included approximately $1.5 billion related to our investment in IBM common stock (of which $848 million related to IBM shares that had been in a continuous unrealized loss position for more than twelve consecutive months), which represented 11% of our cost,” Buffett said. “IBM continues to be profitable and generate significant cash flows. We currently do not intend to dispose of our IBM common stock and we expect that the fair value of this investment will recover and ultimately exceed our cost.”
The global technology company generated $14.3 billion for the trailing 12 months, beating its 2015 cash flow of $12.9 billion. The company has generated more than $10 billion in cash flow annually since 2004. It also has $11.6 billion in trailing 12-month net profit, its lowest since 2007. For the second quarter, it reported $2.5 billion in profit, down from $3.5 billion in the prior-year quarter. IBM also has a P/E of 13.2, P/B of 9.8 and P/S of 1.98, near a three-year high.
At close on Tuesday, IBM shares were priced at $161.77, below Buffett’s estimated average purchase price of $172.31 per share.
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