IBM Thesis For Secular Trends Portfolio
Posted on | September 21, 2008 Time: 5:30 am |
In the rush to get some positions picked up yesterday before the close, I posted on the IBM (IBM) buy without outlining the investment thesis for the Tech/Services 800lb gorilla. 
I started with a half-target position of 2%, getting in at $116.88 with 170 shares. Shares closed Friday at $118.85, mildly participating in the rally.
I have a mild fear of IBM suffering integration problems - the company has made roughly 40 acquisitions in the past two years alone. The long-term strategy of transitioning to software & services is quite mature now, with the two making up the lion’s share of profits. Hardware still makes up more than 50% of sales, as IBM has the market share lead in servers over Hewlett-Packard. Dell is barely treading water in the higher-end segments of the market, and HP now has a huge EDS acquisition to chew on. This should enable IBM to creep up some further market share gains, and their server operating margins remain well above the group. I view their server business as glorified razor/blade scheme, with the blades being software & services. A modest profit from the hardware group is enough to make me happy.
Fluent in 150 languages
Most importantly, IBM has been forming relationships with emerging markets for decades, putting them in the prime position to profit from the global tech rollout. Shares are very affordable at 10x operating cash flows, about 15x trailing earnings, and an Enterprise Value/EBITDA sitting at a very compact 8.5
IBM got rid of its low margin PC business back in 2005, and software growth has been strong. Margins for software are the best you’ll find anywhere outside of boutique pharmaceuticals. Their international diversity should help them keep moderate double-digit earnings chugging along, enough to keep at least a market-level P/E. It’s a great easy way to load up on a bellwether for both Tech and Business Services, and the 2% yield plus constant share buybacks provide a nice tailwind to shareholder returns.
Ryan Barnes
Tags: IBM > Tech Services > Thesis
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