The Greed Case for IBM
Board: Berkshire Hathaway
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.