Buffett + IBM = A match made in steadiness 

By Rex Crum 
Nov 15, 2011

SAN FRANCISCO (MarketWatch) -- The old expression from way back in the day was that no one ever got fired for buying International Business Machines Corp.

That of course was in reference to Big Blue's computing products and the belief that they were so infallible you could do no wrong if you signed your company up to fill a storeroom with its big iron, also known as IBM System/360 mainframes.

But for the last few years, that expression could be applied to anyone who has bought IBM's stock, which hit an all-time high of $190.53 on Oct. 14, and is up 28% this year and 48% over the past two years. Steadiness with earnings and revenue and old-fashioned confidence in the IBM name certainly have made the company a darling for investors.

On Monday, probably the biggest big-name investor of all literally bought the IBM story, and about 64 million shares to boot. Warren Buffett said his Berkshire Hathaway Inc. been scooping up IBM's shares since March. Buffett made the announcement in an interview on CNBC, saying that in addition to buying the company's stock, he hadn't spoken about it with Sam Palmisano, the IBM chief executive who is set to retire Jan. 1.

The fact that Buffett and company were able to spend $10.7 billion on acquiring 5.4% of IBM's outstanding shares over the past eight months without word of that buying spree getting out has to say something about Berkshire's ability to keep its mouth shut when big things are going on. Maybe the company has been taking tips from Apple Inc.?

"It is what it is," said analyst Jason Maynard of Wells Fargo Securities.

The move immediately makes Berkshire one of the biggest holders of IBM's stock. According to the most recent data from FactSet Research, State Street Global Advisors owns a 5.5% stake of IBM's outstanding shares, while the Vanguard Group holds a 4.2% share of IBM's stock.

Calls to Berkshire for comment on why Buffett went public now with his IBM buy were not immediately returned.

Buffett is one of those investors whose reputation is one that precedes the man himself. He's famous for only buying stuff he really understands (such as insurer Geico and See's Candies, for example) and companies that have known brands (like railway company Burlington Northern Santa Fe and Bank of America Corp., in which Berkshire took a $5 billion stake in August). If there was any tech name Buffett was likely to invest in, it was going to be IBM.

One of the hallmarks of IBM is its resiliency. A little less than a month ago, it reported quarterly results that, while not flat-out disappointing, still showed signs of slowing growth for the company. The day after those results came out, IBM's shares fell more than 4%.

What happened after that? The stock bounced back, erasing that loss and now trading back up close to its all-time high.

Yet the question remains why Buffett couldn't have bought IBM a year or two ago for much less, given that its fundamentals then weren't any different than they are today.

"I am surprised to see him enter tech now," said Brian Marshall, who covers IBM for ISI Group and has a hold rating on the stock. IBM has averaged revenue growth of 2% a year for each of the past five years, according to the analyst, who added that 2% may not light the world on fire, but would still fall right in Buffett's wheelhouse.

"I think he sees little downside and is buying a stable franchise with recurring earnings which grow every year," Marshall added. "And I think IBM is priced for perfection."

One thing Buffett said Monday was that he was swayed into buying IBM because of the company's long-term plans. For example, when the company put out its third-quarter report in October, it raised the earnings forecast for 2011 to "at least $13.35" a share, and called it "a good start toward our 2015 road map."

Buffett is counting on that road to remain as straight and bump-free as possible. If for some reason it isn't, it's not like he could fire anyone else for buying IBM when he did.