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No. of Recommendations: 3
Despite Shenanigans, Big Blue's Still Got It
http://seekingalpha.com/article/1114511-ibm-despite-shenanig...


Despite the fact that management artificially inflates earnings per share, International Business Machines Corp. (IBM) is a fantastic company that makes a lot of money. I believe IBM is likely to continue to make a lot of money for a very long time. I also believe the current market price of the company is well below its intrinsic value. In a nutshell, IBM is a great investment.

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IBM is a great business because it has the ability to quickly change to meet client needs. The business model used to be product-based, however management wisely evolved it into a largely services-based company. In the early 1900's IBM "manufactured and sold machinery ranging from commercial scales and industrial time recorders to meat and cheese slicers." In the 1960's and 70's, the business was largely about mainframe computers. Today, the majority of IBM's revenue comes from services, not products. It is the transformation to a services company and away from a manufacturing and products company that positions IBM so well for the future.

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IBM is a fantastic company that makes a lot of money, and it is trading at a very attractive price relative to its intrinsic value. I believe IBM will outperform the stock market over the next ten years due mainly to its impressive services-based business model. However, I do NOT own shares, and I am NOT planning to buy shares anytime soon. There are nuances to IBM's business model that make it less than ideal. For example, I recognize management artificially inflates EPS with share buybacks, and this cannot continue forever. Additionally, I do not approve of IBM's inorganic growth through acquisitions in its software segment as discussed earlier, and the company's already gigantic market capitalization makes valuation increases through growth more challenging. I believe there are IBM competitors that present more attractive investment opportunities because they have access to similar profits through business and technology services, but they have wisely stayed out of the software and hardware businesses, and they have smaller market capitalizations which make valuation increases through organic growth more attainable. In fact, I own one such competitor because I believe it presents an even better investment opportunity than IBM.
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