Buffett on IBM: Berkshire Buys "Big Blue"
http://theinvestmentsblog.blogspot.com/2011/11/buffett-on-ibm-berkshire-buys-big-blue.html
Monday, November 14, 2011
This morning on CNBC, Warren Buffett revealed that Berkshire Hathaway ( BRKa) had accumulated a large stake in IBM ( IBM).
The sheer size of the purchase is, in itself, news. That Buffett is buying a technology company at some scale even more so.
How things seem to have changed.
It's clear that the valuation landscape of some larger capitalization technology franchises is nothing like a decade ago.
Many these days are very inexpensive with quite a few even selling at price to earnings ratios in the single digits.
According to Buffett, the number of shares of IBM bought by Berkshire was around 64 million at an average price of ~$ 170/share.
So the actual amount invested in IBM looks to be somewhat less than $ 11 billion.
As of Friday's close, the share price of IBM was $ 187.38/share meaning, at this time, the shares are now worth more like $ 12 billion.
Even considering Berkshire's size, this is certainly a very large stock purchase.
To put it in perspective, at Friday's closing price here is how the new stake in IBM compares to the size of his three other large holdings*, Coca-Cola ( KO), Well Fargo ( WFC), and American Express ( AXP) are as follows:
Coca-Cola: $ 13.6 Billion
IBM: $ 12.0 Billion
Wells Fargo: $ 9.0 Billion
American Express: $ 7.6 Billion
Those 4 stocks now make up roughly two thirds of the entire $ 60 billion plus Berkshire Hathaway domestic equity portfolio.
It will be interesting to learn over time what Buffett sees as IBM's durable competitive advantage(s).
Historically, Buffett has made it clear why he avoids things like technology businesses. He prefers industries with little change. On many past occasions, he has explained how difficult he finds it to gauge the economic durability of most technology businesses.
...you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek. - Warren Buffett in the 1996 Berkshire Hathaway Shareholder Letter
What's the economic moat? What is it going to look like in ten years or so? Bigger or smaller? By their nature, tech businesses often reside in a rapidly changing and competitive industry environment.
Now, the IBM of today is nothing like old-school IBM. The company's model now places more emphasis on providing higher margin software and service to IT departments, less on the brutally competitive lower margin hardware business.
The current way of doing business would seem to offer more flexibility, utilizing IBM's expertise to adapt to changes in the technology landscape.
In the interview, Buffett did say "I've probably read the annual report of IBM every year for 50 years" and that this year he "got a different slant on it."
Buffett also said he checked with the IT departments of the company's Berkshire owns:
"...to see how their IT departments functioned and why they made the decisions they made. I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things."
He was also complimentary of the share buybacks that have been done over the years. IBM has reduced the share count substantially since year end 2006 with shares outstanding reduced from over 1.55 billion to 1.19 billion in less than five years.
Still, hearing a more comprehensive explanation at some point of how he sees IBM meeting the "certainty we seek" threshold noted above will be of some interest.
He did equate, to some degree, coming to the IBM party late so to speak and his changing view of railroads over time.
IBM currently sells for slightly more than 14x earnings so, while not expensive, not nearly as cheap as some other large cap technology companies.
It's not the first time he seemed to be buying at higher prices. From the interview:
"We bought railroads on highs..."
and
"I bought control of GEICO at its all-time high."
As investments, in both cases, these worked out okay.
He started buying the shares back in March but, since sometimes the SEC allows Berkshire's buying to be kept confidential, the position wasn't known until he disclosed it today. Permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.
Adam |
