Why we can’t have nice things: The reaction to IBM’s big black and blue quarter

IBM announced yesterday that it had a terrible quarter. They missed earnings, the stock plunged, and Warren Buffett lost a billion dollars.

Everyone assumes Warren Buffett is worried, or livid, and selling off the stock like it’s on fire.

Here’s the thing about IBM. IBM started out selling punchcards and time clocks. They don’t anymore. Their business model has changed over its century-plus of existence.

And as big as they were in decades past, they are 10 times as big and rich today as they were in 1978, when they were known for selling typewriters and mainframes. And when you look at their last decade, which has done well, they’re doing the same things now they did then, shedding low-margin and loss-making businesses off while concentrating on high-margin businesses. The low-end server line is headed for Lenovo now, and the chipmaking business is headed for Globalfoundries, the AMD spinoff who makes chips. They’ll continue to make software, sell services, run datacenters, and sell AIX (proprietary Unix) computers, minicomputers, and mainframes, which are helplessly uncool but still make a lot of money due to lack of competition. They’ll also continue to collect on patents for years to come–IBM is one of the few companies left that invests a lot of money in research.

IBM doesn’t need to restructure or split up because they’ve been doing it constantly for 25 years. Through the years they’ve spun off their printers, typewriters, PCs, hard drives, and now their x86 servers and chipmaking. Arguably they’d have been better off if they’d sold off their chipmaking a couple of years ago, but they haven’t had to do a major restructuring like rival HP, which now is looking to split in two to right itself.

So I have every reason to believe IBM will rebound within a year or two. It’s trading at 10x earnings right now while the rest of the market is trading at 15x earnings. IBM stock is on sale.

If the price of toilet paper suddenly dropped 15%, people would buy a couple of extra packages and stash them in the closet until they needed them.

But for some reason, when the stock of a mature, established company suddenly drops in value, people rush to sell it when what they really need to do is buy more of it.

I say this because IBM has turned itself around before, so there’s no reason to believe IBM won’t work its way out of the doldrums this time as well. IBM’s been playing some financial games, but that’s kept activist investors at bay while they do what they need to do. I don’t think IBM will ever be glamorous, but I do think IBM will rebound just fine.

2 thoughts on “Why we can’t have nice things: The reaction to IBM’s big black and blue quarter

  • November 12, 2014 at 9:56 am
    Permalink

    I tried to post this before, but I couldn’t.

    ———–

    I really don’t know what is going to happen to IBM, but…

    Sam Palmisano, former CEO, in 2010 established a very difficult goal to achieve, that by 2015 Earnings Per Share (EPS) should reach $20.00. The current CEO, Ginni Rometty, is plowing ahead with the plan, no mater what. They have been divesting business units (not necessarily bad), cutting expenses to the bone (firing thousands of employees in the US and Europe, outsourcing most of the services to India while alienating customers in the process) and, as you correctly said, doing financial games (buying back billions of dollars in their own shares and thus raising the EPS, since there are less shares on the market). I consider that 2015 plan stupid. It has nothing to do with growing the business or investing in the future. It only has to do with short term “hocus pocus” to boost the CEO’s bonuses at the expense of the company.

    Regarding Warren Buffet, I consider him the best investor in history, but he is human and he can be wrong (he has been wrong!). In fact his IBM position is contrary to his usual investing strategy since he has admitted time and again that he does not understand technology and that he only invests in things he understands. Besides, nobody really knows what is the whole IBM deal (maybe he got warrants from IBM, or maybe he knows he has to get out before/soon after the 2015 deal is achieved).

    As a micro investor myself I have stayed away from IBM even though I follow Buffet very closely, because I doubt I can exit an IBM position with profits. Right now the shares are cheaper than when Buffet started buying at $172.80 but I am letting the opportunity go.

    Francisco

  • December 4, 2014 at 1:23 pm
    Permalink

    I really don’t know what is going to happen to IBM, but…

    Sam Palmisano, former CEO, in 2010 established a very difficult goal to achieve, that by 2015 Earnings Per Share (EPS) should reach $20.00. The current CEO, Ginni Rometty, is plowing ahead with the plan, no mater what. They have been divesting business units (not necessarily bad), cutting expenses to the bone (firing thousands of employees in the US and Europe, outsourcing most of the services to India while alienating customers in the process) and, as you correctly said, doing financial games (buying back billions of dollars in their own shares and thus raising the EPS, since there are less shares on the market). I consider that 2015 plan stupid. It has nothing to do with growing the business or investing in the future. It only has to do with short term “hocus pocus” to boost the CEO’s bonuses at the expense of the company.

    Regarding Warren Buffet, I consider him the best investor in history, but he is human and he can be wrong (he has been wrong!). In fact his IBM position is contrary to his usual investing strategy since he has admitted time and again that he does not understand technology and that he only invests in things he understands. Besides, nobody really knows what is the whole IBM deal (maybe he got warrants from IBM, or maybe he knows he has to get out before/soon after the 2015 deal is achieved).

    As a micro investor myself I have stayed away from IBM even though I follow Buffet very closely, because I doubt I can exit an IBM position with profits. Right now the shares are cheaper than when Buffet started buying at $172.80 but I am letting the opportunity go.

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