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Bram de Haas
Bram de Haas
Articles (182)  | Author's Website |

4 Reasons Buffett Sold 25 Million Shares of IBM

Guru told CNBC why he sold IBM shares in the 1st and 2nd quarters

May 05, 2017 | About:

After discussing the U.S. economy on CNBC, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio) announced Berkshire sold about one-third of its position in IBM (NYSE:IBM) – 25 million shares.

It sold the shares in the first and second quarters at above $180 per share. That's big news because Berkshire bought the shares at a higher level.

Buffett gave four reasons:

  • The way the level of earnings developed over the years wasn't what Buffett had in mind.
  • The quality of earnings did not improve.
  • IBM faces increased competition.
  • Guru wanted to lock in tax losses.

Earnings

Earnings over the past five years did not develop very favorably and that's while IBM was buying back tremendous amounts of stock:

1760641182.png

Almost certainly Buffett expected earnings before buybacks to stay level while the aggressive buybacks would create value. Unfortunately it appears IBM's earnings power appears to have decreased.

Quality of earnings

Barely audibly Buffett threw in a comment about quality of earnings. He made an understatement about how it certainly did not improve. It was a crucial comment. Quality of earnings matter, and the reduction reflects Buffett's belief that IBM's competitive moat is shrinking. One easy way to get a sense of that development is to look at free cash flow from operations:

764117172.png

It decreased much faster than earnings over the past five years meaning current earnings are less sustainable than you'd expect otherwise.

Increased competition

IBM ran into some very tough competition, Buffett said; he complimented Jeff Bezos as the best manager of his time and recommended the superstar CEO's recent interview with Charlie Rose. Buffett found it remarkable he managed to grow a top retailer and become a leader in the cloud through AWS. They aren't completely unrelated, but that doesn't really matter; it seems Buffett more or less admitted cloud is a much bigger threat to IBM than anticipated.

Lock in tax losses

Finally Buffett doesn't believe the capital gains tax will go up next year. It could go down, though, and therefore he wanted to sell some of the shares where he held the largest negative capital gains to put those losses on the books for this year.

Coupled with his comments of how Berkshire sold above $180 but could be buyers at current prices ~$160 this played quite a bit of a role in his decision to sell at $180, and he might have required $190 to $200 if this did not play a role. That's speculation on my part.

Conclusion

Buffett sold IBM because its competitive moat has been shrinking, its quality of earnings have been deteriorating, the earnings trend disappointed over time, and he sold above $180 and wouldn't at ~$160.

Disclosure: Author owns no stock mentioned.

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About the author:

Bram de Haas
Bram de Haas is the author of the The Black Swan Portfolio @ Seeking Alpha and managing partner of several investment partnerships.

Visit Bram de Haas's Website


Rating: 5.0/5 (1 vote)

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Comments

Roger Stera
Roger Stera premium member - 6 months ago

Thanks for the article (or: Dankjewel voor dit artikel :)

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