Warren Buffett we was a guest on CNBC yesterday and disclosed he has built a position in International Business Machines (IBM). Here’s what he is looking at, through my eyes.
One-Year Chart
IBM’s been on a steady climb higher this year. Profit growth has been in the high-teens, and 11% growth is expected the next two quarters. Big Blue has beaten the street in each of the past four quarters, and Annual Profit Estimates have been rising all year, so there estimates can be beat.
The P/E of 12 seems low, but this stock usually has a low P/E. I think it should be higher. For 12 times earnings investors get a company set to grow an estimated 11% a year for the next 3-to-five years PLUS get a 3% dividend. That’s a 14% total return — for under 12 times earnings.
Ten-Year Chart
IBM is also around an all-time high, in fact its been on a tear for three years. This stock sank in 2008 and the company is susceptible to recessions. IBM is often seen as a barometer for ends of recessions and/or beat markets as it often rises before the market does.
What I really like about this chart is the yearly profit growth has been 12% this decade, the stock growth 5% a year. These figures should be similar, and that tells me IBM stock has some catching up to do.
Fair Value
I think IBM should get a P/E of 15. That means good upside the next couple of years for a conservative investment. The upside/downside doesn’t take the 3% yield into effect — that’s a bonus.
Bottom Line
I like IBM a lot, its just not growth enough for my growth portfolios. Look at the earnings table here, the quarterly estimates aren’t up to my specifications. I think this is a great investment for conservative investors.
Disclosure: Clients of David Sharek owned shares of IBM at the time of publication.
