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The Greed Case for IBM

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October 18, 2013 – Comments (4) | RELATED TICKERS: IBM , BRK-A

Board: Berkshire Hathaway

Author: mungofitch

I did what I could to stop the slide after hours. Purely as a public service, of course.

It's bad if earnings are rising due to some ill-advised over-exuberant cost cutting. It's bad if earnings per share are rising due to buybacks funded by rising debt. It's bad if they are adding earnings by overpaying on acquisitions.

But I don't think those things are dominant. The top line doesn't matter. Rising EPS from buybacks are real and they're also sensible at current valuation levels, ditching low-return businesses and building and buying high return businesses is smart. Organic growth in profits is a good thing, and can coexist with a flat top line.

So, if you think the three bad things are the biggest news and will remain big worries in the next couple of business cycles, then worry. If not, rising EPS are good and a low price is good. Low price now, high price later is the best situation. The longer the price tanks, the more shares get retired per $billion of buybacks.

Here's the greed case: I think they'll hit their $20 EPS someday, probably by 2016, and that their business probably won't erode from there. I think they'll trade at a multiple of 14x current earnings some day after they hit their $20 target. Thus, I think they'll trade at $280+ someday. The annualized return I'll get is merely a function of how many years that takes. I just picked up a few shares at average price $177.18 after hours. If it takes the 3-4 years I expect to hit $280, that's 13.6%-18.0%/year compounded. If it takes 6-8 years it's still 7.3%-9.3%/year—sad, but hardly a wipeout. All we need is for them to keep on truckin'. If you buy the notion that the shares are going to do OK and not fade away, it's one of the few things out there that seems quite reasonably priced. I admit that one reason I think they won't fade away any time soon is that it's Mr. Buffett's largest ever dollar purchase of common stock, including $824m worth at average price $195.75 during FY 2012. His picks aren't all gold, but they rarely crash and burn.

 

4 Comments – Post Your Own

#1) On October 18, 2013 at 2:56 PM, afewgoodstocks11 (25.95) wrote:

I am sure that IBM has a few competent accountants, and that they are presenting the info how they want. With every drop they have a better price on their buybacks.

Trust Buffet.

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#2) On October 18, 2013 at 7:50 PM, kcanant (99.76) wrote:

Trust Buffett as well.

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#3) On October 19, 2013 at 10:31 AM, GirlsUnder30 (97.11) wrote:

Mr. Buffet does have an impressive track record but he has been known to come in a little earlier than most. He started buying USG at nearly $20 before its deep decline to $5 in 2009. Buybacks are a gamble and you don't need to look any further than Radio Shack to see how disastrous they can turn out. There are only a few tech stocks that look attractive to me at this point and IBM is not one of them. I really like the miners here, I don't see a better sector not only as an monetary devaluation hedge if the economy continues to struggle but as a huge earnings catalyst if production heats up. Take a look at this:

http://caps.fool.com/Blogs/how-a-delist-made-the/877429 

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#4) On October 23, 2013 at 2:36 PM, Raphael1990 (91.68) wrote:

Management actually states that their goal is $20 for 2015. And 14 is a very conservative multiple. So IBM looks pretty compelling at $175 per share, because $280 over 3-4 years is probably the low end of the expected return range. A more average outcome might be $300-$350 in by the end of 2016.

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