Why You Should Be Bullish on IBM

by Investing Daily
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Submitted by Investing Daily as part of our contributors program.

Investing Daily editor Jim Fink keeps a close eye on the buys and sells of America’s most successful investors. One way he does this is by taking a regular look at their 13F filings.

Institutional money managers with assets of more than $100 million must file a Schedule 13F with the SEC every quarter to update the regulator on their current stock holdings.

The documents are well worth reading, says Fink.”These quarterly SEC filings are a gold mine of information as to what the smartest investors are buying and selling. A timely review of them can make you money.”

Buffett’s Investment in IBM Corp. Was a Big Story in 2011

Fink was also paying close attention last November, when Warren Buffett bought 5.5% of IBM Corp. (NYSE: IBM) for $10.9 billion. As he noted at the time, the move made IBM the second-largest stock position in Berkshire Hathaway’s entire investment portfolio, behind Coca-Cola (NYSE: KO).

(Buffett, of course, has been in the news recently after he announced that he has been diagnosed with prostate cancer. He still plans to stay at the helm of Berkshire Hathaway during his treatment, however.)

The purchase was seen as a radical departure for the Oracle of Omaha, who has traditionally shunned tech stocks because their businesses are often difficult to understand.

But as Buffett explained in an interview with CNBC, he sees IBM Corp. as more of a servicing company for IT departments than a tech firm. He also noted that contracts for technology services tend to be long lasting—much like a company’s relationships with outside accountants and lawyers.

That was evident when IBM Corp. reported its latest quarterly earnings. The story? Gains in services and software offset weakness at the company’s hardware division.

Latest IBM Corp. Earnings Beat Expectations—but Its Revenue Miss Rattled the Market

In the first quarter of 2011, IBM’s operating income was $2.78 a share, up 15% from a year ago. That was well ahead of the $2.65 a share that the Street was expecting. This was the 27th straight quarter that the company has met or beaten earnings expectations.

However, IBM Corp. reported flat revenue from a year ago, at $24.7 billion. That was shy of the consensus estimate of $24.8 billion. Sales at the company’s services and software segments rose 2% and 5%, respectively. Hardware sales declined 7%. IBM’s overall profit margins improved to 45.1% from 44.1%.

The revenue miss caused the stock to drop 3.5% yesterday, to $200.13.

Analysts Optimistic About IBM Corp., but Competitors Could Be Catching Up

Analysts at J.P. Morgan saw the dip as a buying opportunity:

“We recommend that investors take advantage of any ‘sell-on-the-news’ weakness in shares of IBM. We reiterate our overweight rating and lift our recently raised estimates. While software growth in 1Q was slightly lighter than we expected, we expect a reacceleration as recently closed deals stand to have a full quarter impact on 2Q in contrast to the partial impact on 1Q.”

Morgan maintained its $225 price target on the stock, but a number of other analysts raised theirs. One was Stifel Nicolaus, which boosted its 12-month target to $230, citing among other things the company’s slightly increased EPS guidance for 2012.

Still, others worried the flat sales may be a signal that IBM’s big lead over its competitors is starting to shrink. RBC Capital Markets analyst Amit Daryanani expressed this opinion in a research note quoted in an article on Investors.com:

“Competitive challenges are emerging from companies that are seeking to build a business model similar to IBM’s. As an increasing number of competitors move toward the model of partnering services, hardware and software, we believe that the competitive advantage IBM has long enjoyed from a broad product portfolio and services could erode.”

Emerging Markets Have Big Potential for IBM

Despite the rising competition, IBM remains a market leader. At the same time, it’s a company in transition. But as Buffett clearly realizes, it stands to gain as it continues its move into services and software.

It’s also making big headway with its strategy to grow overseas, particularly in emerging markets like the BRIC countries (Brazil, Russia, India and China), where its revenue jumped 10% in the latest quarter, compared to a 1% rise in the Americas and a 2% drop in Europe.

As The Economist put it after Buffett bought his big stake, “No one ever got fired for buying IBM, goes an old adage in corporate information technology. In the financial world, no one ever gets fired for investing like Mr. Buffett.”

Article originally posted here.

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