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Old tech

14 November 2011 By Agnes T. Crane

Warren Buffett’s well-known aversion to tech stocks got Twitter feeds chirping about his disclosure on Monday that Berkshire Hathaway had amassed a $10.7 billion stake in IBM. But the move says more about the evolution of Big Blue’s investment profile than it does Buffett’s.

Despite jettisoning its PC business seven years ago, IBM still remains a part of the technology landscape. But to broadly portray the company as part of the same family with Apple and Google hardly captures just how much it has matured.

IBM was once more closely associated with the cutting edge of supercomputers, for example creating the first one to beat a human being at chess. Just a few months ago, however, IBM walked away from Blue Waters, a next-generation project that could, for example, crack the code on tornado formation. Younger Cray instead picked up the deal, in an announcement that came hours ahead of Buffett’s.

That doesn’t make IBM an also-ran but underscores what the Oracle of Omaha might see – and not see – in this tech departure. Big Blue is now a predictable, well-branded consulting and services firm.

Unlike many plucky upstarts, IBM has a long-term plan, one it outlined in detail back in March when Buffett says he began buying shares. Second, the company’s management looks steady for its industry, if the smooth CEO succession unveiled last month is any gauge. Investors hardly blinked last month when IBM promoted an insider, Virginia Rometty, to take over from Sam Palmisano.

Finally, IBM also looks cheap, in contrast to the frothy multiples that often characterize stocks in the sector or Big Blue’s peers. IBM trades at 14.8 times earnings, according to Thomson Reuters data, compared to Oracle’s 18.4 times and Accenture’s 17.4. The tech industry trades at a median multiple of 21.9.

These are all the sorts of characteristics that attract value seekers like Buffett. Technically speaking, IBM may be an unusual foray into technology. But an octogenarian investor isn’t likely to change his spots. The stake Buffett bought explains how IBM’s have.


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