With the earnings at IBM slowing and the stock actually generating a negative annual return of 4.1% over the last three years, you would think that Warren Buffett – legendary investor – would sour on the stock. But that isn’t the case at all.
“I’m buying it because I like it,” said Buffett on CNBC.
Berkshire Hathaway, as of December 31, owned 7.8% of the outstanding shares of the company.
“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 could be making reference to the fact that until Berkshire Hathaway finishes buying all of their shares, they want the stock price to drop so they could purchase even more at a lower price.
“There were 1.6 or 1.7 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,” explains Buffett.
“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.” The overall result is that it increases the Berkshire Hathaway stake in the company.
If a company is purchasing its own stock, as the majority of the companies do that Berkshire Hathaway invests in, “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,” noted Buffett.
“There have been no surprises at IBM,” added Buffett. “We expected revenue to come down. We expected a year like this where foreign exchange would take a whack off revenues.”
The stronger dollar has hurt IBM by making the company’s foreign revenue worth less money in terms of the dollar. The total revenue at IBM dropped by 7% last year to $92.8 billion.
Jim Cramer, CNBC commentator, mentions that the jury is still out on the Berkshire Hathaway IBM investment.
“If they [IBM] can pull off this transaction and become a social, mobile, cloud, security and data analytics company, then Warren Buffett is going to be right,” says Cramer.
“If they can’t pull it off, they could be like the Tesco investment that he made,” adds Cramer, referring to Berkshire Hathaway losing money on it investment in the British grocery store.
Peter Wahlstrom, analyst at MorningStar, thinks quite highly of IBM.
“IBM holds a defensible position in enterprise software, services and hardware,” writes Wahlstrom 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.”
No doubt that the company has its problems, says Wahlstrom. But “we believe IBM’s product development and entrenched customer relationships will ensure that the firm maintains its competitive advantage.”