Tags: Buffett | IBM | share | revenue

Buffett Hasn't Lost Faith in IBM

By    |   Tuesday, 03 March 2015 10:00 AM

With IBM earnings sagging and its stock generating a negative annual return of 4.1 percent during the last three years, you might think that legendary investor Warren Buffett is souring on it. But that's not the case.

"I'm buying it because I like it," Buffett tells CNBC.

Buffett's Berkshire Hathaway owned 7.8 percent of the company's shares as of Dec. 31.

"It's been doing exactly what I like ever since we started buying it a few years ago. People have this misconception that when we buy a stock, we want it to go up. That's the last thing we want it to do."

He may be referring to the fact that until Berkshire is finished buying shares, it wants the stock price to fall, so it can buy at lower levels.

"There were 1.16 or 1.17 billion shares outstanding when we started buying and a fair number of options out there — maybe 40 million shares or something like that. That overhang has been reduced significantly and the number of shares is 990 million," he explains.

"I actually wrote a couple of years ago when we bought it that the best thing that could happen is if the stock did nothing for five years because they [IBM] were going to buy back a lot of stock. And the cheaper they bought it, the more shares they bought." This has the result of increasing the stake Berkshire has in the company.

If a company is buying its own stock, as most of the companies Berkshire invests in are doing, "our interest in the company is increasing day after day and if the company is buying it, we're not laying out a dollar. If we're buying it we're laying out some money, but we're buying it cheaper. And I like buying anything cheap," Buffett notes.

"There have been no surprises at IBM," he adds. "We expected revenue to come down. We expected a year like this where foreign exchange would take a whack off revenues."

The strong dollar has hurt IBM by making its foreign revenue worth less in dollar terms. IBM's total revenue slid 7 percent last year to $92.8 billion.

CNBC commentator Jim Cramer says the jury is out on Berkshire's investment in IBM.

"If they [IBM] can pull off this transition and become a social, mobile, cloud, security and data analytics company, then Warren Buffett's going to be right," Cramer notes.

"If they can't pull it off, they could be like the Tesco investment that he made," he adds, referring to Berkshire's money-losing investment in the British grocery company.

Morningstar analyst Peter Wahlstrom thinks highly of IBM.

"IBM holds a defensible position in enterprise software, services and hardware," he writes on Morningstar.com. "While each of these businesses is an industry leader in its own right, the combination of these products and services provides the firm with a unique solution creation perspective and delivery ability that is key to its wide economic moat."

To be sure, the company has its problems, Wahlstrom says. But "we believe IBM's product development and entrenched customer relationships will ensure that the firm maintains its competitive advantage."

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With IBM earnings sagging and its stock generating a negative annual return of 4.1 percent during the last three years, you might think that legendary investor Warren Buffett is souring on it. But that's not the case.
Buffett, IBM, share, revenue
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2015-00-03
Tuesday, 03 March 2015 10:00 AM
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