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Buffett Bargain Stock IBM Should Be Bought With Both Fists

Besides the 4.5 star rating and fair value estimate of $284 from GuruFocus.com, International Business Machines ( NYSE:IBM ) can be bought for $20 cheaper today than Warren Buffett's total buy in price. With the Oracle's company Berkshire Hathaway ( NYSE:BRK.B ) owning 8% of the stock, imagine if he's buying an even more controlling stake while you're reading this piece.

Lest we forget that in his 2011 letter to shareholders, Buffett proclaimed that IBM would "likely spend $50 billion or so... over the [upcoming] five years... to repurchase shares. What should a long-term shareholder, such as Berkshire, cheer for during that period? We should wish for IBM's stock price to languish throughout the five years."

Prophetic? Maybe accurate? Yes.

IBM has indeed languished for the last few years. In fact, since Feb. 25, 2012 (the date of Buffett's letter) IBM's stock is down 50 points (25%), but has anything significant changed for the worse?

Revenue and income have both fallen off, not something that would necessarily instill confidence. However, in the same time, management has bought back 221 million shares, presumably in the $150 to $200 range, and it has increased dividends from $2.90 to $4.60. This year they'll be around $5.20.

From a business standpoint, IBM is the undisputed leader in its industry. The company doesn't have a consumer-driven brand like Apple, which helps shield it from wild swings in that behavior. The company has a massive moat in enterprise software and IT consulting services, employing highly trained and skilled workforce to accompany new innovations like Watson and the Internet of Things (IoT).

Watson is IBM's supercomputer that is rather game changing. It could be as transforming to the industry as the Apple ( NASDAQ:AAPL ) iPhone was to personal handhelds - as long as it doesn't turn into Skynet.

A great resource for Watson: http://www.ibm.com/smarterplanet/us/en/ibmwatson/

From a historic numbers standpoint, IBM needs to do a better job with organic growth. Thanks to Watson, IoT and a growing workforce of data scientists, this could be possible. I don't think it's a good thing to see dividend growth outpace earnings and revenue growth, but if it does, the next decade will mean IBM will pay out most of its earnings to investors. With gross margins in the 50% range, the company can certainly afford it.

2005

  • Revenue: $91 billion
  • Income: $7.9 billion
  • Dividends: 78 cents

2015 ( TTM )

  • Revenue: $86 billion
  • Income: $11.2 billion
  • Dividends: $4.60

From a valuation standpoint, the company looks to earn about $16 per share this year. With the stock's current multiple, that equates to $200, but how far fetched is it to think that over the next few years investors will see a 15x multiple and earnings reach upwards of $20 per share? While it's difficult to predict the growth in earnings based solely on what the company has done in the last decade, I think it's fair to say that if Buffett has staked more than 11% of Berkshire's portfolio on the company, he's looking for growth, and so should you.

With the stock trading at $144 today, it's well worth the risk. We might even see more buying in IBM from its largest shareholder or other guru investors like these:

  • Joel Greenblatt (Trades, Portfolio) owns 205,000 shares
  • Prem Watsa owns 1.3 million shares
  • Ruane Cunniff (Trades, Portfolio) owns 1.3 million shares
  • Brian Rogers (Trades, Portfolio) owns 1.5 million shares

About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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