In this age of instant gratification, we shouldn’t be overly surprised to see IBM’s share price drop after another consistent set of financial results released earlier this week. Consistent as it is now the 14th successive quarter the tech giant has reported lower revenues. And because the numbers show IBM is holding course in re-inventing its business by divesting in legacy areas, buying into new.
The latest set of results, gave those who share Mr Market’s volatile nature even more reason to panic – as they did when driving IBM’s share price down 5%.
Selling was doubtless fuelled by the hostile reception towards CFO Martin Schroeter in yesterday’s investor conference call when Wall Street analysts peppered him with questions about when the revenue slide would reverse. They were equally unimpressed with the updated forecast of their other big number, annual Earnings Per Share, which was being adjusted downwards by almost a dollar from the previous quarter, to between $14.75 and $15.75.
Is Warren Buffett among those who are so obviously fretting about IBM’s financial results for the three months to end September? Not exactly. More likely Buffett will be adding fresh purchase orders after focusing his mind on the progress which IBM is making in its transformation. Progress which the quarterlies show to be excellent with “strategic” activities – now a quarter of total revenues – maintaining annual revenue growth of 30%.
IBM’s biggest single shareholder will also be delighted to see a 12-month trailing free cash flow rising to $13.6bn at the end of September (June: $13.2bn), which provided extra firepower to accelerate its share buy-back programme. During the quarter, IBM bought a further 10m of its own shares in the market, taking total purchases for the first nine months of 2015 to 24m shares at a cost of $3.8bn.
Read also:Â Warren Buffett buys more IBM shares, lifts holding to 7.8%
The momentum in IBM’s share buybacks will please Buffett who added another 2.5m IBM shares to his substantial stockpile during the first three months of 2015 and disclosed in a recent CNBC interview with Becky Quick that he’d bought still more between July and September.
At Biznews, we’re also big fans of IBM’s strategy of helping its existing client base (10/10 top global banks; 9/10 biggest US retailers, etc) become more productive through efficiently using Big Data; switching their IT into the Cloud; and designing eco-systems improve client engagement.
IBM is one of the six stock picks in our Biznews Global Share Portfolio, designed to fulfil Buffett’s advice that the best holding period of a share is “forever”. Â Despite this longer-term focus, the portfolio’s return is running at an annualised 29%.
After this set of financial results – and Mr Market’s immediate thumbs down – how should you react?
You can’t really find any better advice than Buffett, whose Berkshire Hathaway has developed under his guidance from scratch to the fifth most valuable company on earth. The combination of Buffett’s own recent accumulation and IBM’s share buy-backs, has taken Berkshire stake in IBM to 8.2% – up from 7.8% at the end of 2014 and 6.3% the year before.
Berkshire’s IBM shares, bought over the past few years, were acquired at an average price of $169. The stock is today freely available at $149. It’s not often amateur investors are able to buy such an obvious Buffett Stock Pick at a discount to the price which the Oracle of Omaha has paid. IBM itself also values its own shares higher than Mr Market – this year’s purchases were made at an average price of $158.
At current levels, Buffett’s $13.5bn investment into IBM is worth $11.8bn – a “loss” of $1.7bn. That’s a sizeable reverse, even for someone with a core portfolio worth over $100bn.
But Buffett’s confidence in IBM CEO Ginny Rometty’s strategy has never wavered. Neither should yours. Long-term investors profit from being greedy when others, guided by the erratic Mr Market, are being fearful. Or, in this case, simply foolish.
