Professional investors love to watch see where the whales are investing, and on Monday they got a glimpse of where the billionaires are putting their money with the release of the 13F filings. Among the most noteworthy was the announcement that super-investor Warren Buffett has been buying up IBM shares worth upwards of $10 billion, giving Buffett an approximate 5.5% stake in the firm.
The announcement came as a surprise to many who regularly follow Mr. Buffett’s investments, as he has traditionally eschewed technology companies due to their questionable fundamental durability in the long-term and difficult to understand businesses.
The consensus in response to Buffett’s announcement was that IBM was priced perfectly, although anyone familiar with Mr. Buffett’s investing style is aware that the “Oracle of Omaha” does not routinely purchase businesses that are not considerably undervalued.
It is extremely unlikely that he has broken that trend in this situation, and while Buffett could certainly be wrong, there certainly appears to be reason to be excited over the fundamentals of IBM’s business and growth potential moving forward. The key is to understand precisely where IBM conducts business, production wise as well as geographically.
IBM Revenues Focus On High-Margins, Growth Markets
Revenues for IBM in 2010 were broken down into four categories: software, services, financing and hardware with software accounting for 44% of revenue. The majority of revenue derived from software comes from data warehousing – expected to be a growing need in the future as data volumes are expected to increase 29 times by 2020 – as well as predictive analytics and data management.
IBM also garners 39% of revenue from services which are broken down into Global Business Services and Global Technology Services. Global Business Services are geared toward “the cloud”, consulting business on how to grow, transform and strategize, while IBM’s Global Technology Services provides IT infrastructure for corporations as well as business process services and automation.
IBM provides financing options to assist businesses with the purchasing of products, and financing accounts for 9% of IBM’s revenue. Hardware such as System X, Power Systems, System Z and other systems utilized for data storage also account for 8% of revenue for the technology giant.
The technology company enjoys global exposure with the United States accounting for $35.6 billion in revenue, Japan accounting for $10.7 billion and an impressive $53.6 billion in revenue from other countries including growth markets in India, Brazil and China.
Long-Term Growth Prospects On The Horizon For IBM
For investors who are willing to consider IBM for a long-term investment, it is important to study the company’s five year road-map where investors are looking at an EPS of $20, and 30% of the company’s revenue being derived from growth markets. It is expected that software will comprise half of IBM’s total revenue, and the company will be sitting on $100 billion in free cash flow, amounting to $20 billion in free cash flow annually.
IBM’s current price of $188 means that the technology company would be trading at 9.4 times earnings for 2016-2017, with the majority of growth in earnings realized through repurchasing shares, a strategy the company has used in the past. Considering the company’s impressive generation of cash flow, and current cash reserves of $11 billion, these share repurchases would be financed easily.
There is no doubt that IBM is still growing, and as the company continues to leverage itself in markets that are rapidly growing and in need of their services and products, IBM’s top line should experience growth that is sizable enough to considerably effect earnings.
Investors who are looking for income can also enjoy IBM’s current yield of 1.60%, which is expected to grow in the future, and when combined with double-digit growth in EPS, investors in IBM will surely beat benchmark profits over the long-term.
IBM is considered to be fairly priced at current levels with a P/E of 14.8, but the true value in this technology company will lie in the fact that IBM is focusing on high margins, strategic global diversification, share repurchases, and generating large amounts of cash making it well positioned to withstand a global economic recession and continue to profit in the future.
