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BERKO: IBM survived – but failed to keep up with – the times

DEAR MR. BERKO: How many shares of IBM does Warren Buffett own? I was told to buy IBM because it’s one of his largest positions and it pays a good dividend. My broker says IBM can trade as high as $275 in the next 12 months and wants me to buy 500 shares. I’d like your take on this. – GS, Bloomsburg, Pa.

DEAR GS: If you believe IBM can trade at $275 late next year, please consider cutting back on those “happy chemicals” that embellish your perceptions. I didn’t like International Business Machines in 2009 when it traded at $100 a share. I didn’t like IBM in 2013 when it traded at $215. And I didn’t like IBM late last year at $169 when I wrote a “don’t buy” column on the stock. IBM has been a drag on the Dow Jones Averages since June of 1979 when it was first included in the Index. According to Bloomberg’s Jim Cao: Since IBM was added to the Index, “its grown just 17 fold compared with more than 60 fold for the Dow.”

And I don’t like IBM today as it trades at $133. Though Berkshire Hathaway’s 81 million shares of IBM cost $13 billion, it’s the fourth largest position in Buffett’s portfolio behind: No. 1 Wells Fargo, worth $22.7 billion; No. 2 Coca-Cola, worth $16.8 billion; and American Express, worth $13.4 billion. Buffett began buying IBM in early 2011 at $159 and throughout the year, paying between $159 and $173 per share. And in 2012, Buffett paid as high as $197 for the stock. So far Berkshire has $2.2 billion in unrealized losses on its IBM investment. While I have abiding respect and reverential admiration for Buffett, I doubt IBM can generate enough good news to push itself past the $200 mark late in 2016. Is it possible that your broker said, “IBM can trade as high $175 (not $275) in the next 12 months?” Still, I doubt it can return to $175.

This century-old Blue Chip survived the Great Depression, World Wars I and II, the explosive dot-com bubble and the “Great Market Collapse” between 2007 and 2010. And it’s interesting to note that during WWII, IBM assisted the Nazi regime by designing special punch card machines giving the Third Reich critical information technologies in its war efforts against Allied forces. And Thomas Watson, IBM’s vaunted CEO, met with Hitler in 1937 to discuss IBM’s continued participation with the German government. Even after the outbreak of the war, IBM continued to conduct business with the Third Reich. Proof that profits don’t have a conscience or nationality.

Meanwhile, IBM’s hidebound management missed some important trends: social, mobile, big data analytics and the cloud. Big Blue, as IBM is fondly called, has been terribly late to the game and is trying to play catch up. But management is having trouble coming to grips with a sinking demand for main frames as more data and computing services are hosted off-site. IBM quit making servers in 2005. It still makes mainframes even though mainframe applications are very difficult to modernize for new environments, especially mobile.

Big Blue expects continued lower revenues of $80 billion this year, which marks 15 consecutive quarters (soon to be 16) of revenue declines. Meanwhile, recent year-over-year earnings also continue to decline. However the board increased the dividend, which has grown in each of the last 15 years, to $5.20, and that’s very nearly a swell 4 percent return. The best I can say about IBM is that is it a lovely company with 17 percent net profit margins and $18 a share in free cash flow. In the last decade, IBM has been ridding itself of non-core businesses while adding 130 small acquisitions (WOW) to its portfolio. I fail to see any worthwhile upside potential with the current CEO at the helm. But there’s quiet whispering that Apple CEO Tim Cook, who was an “IBMer” between 1986 and 1998, believes there are some great synergies by merging the two companies. Another quiet whisper is that Tim may leave Apple to become CEO of IBM. Either of these scenarios is a plausible extension of reality.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.

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