The technology cognoscenti habitually roll their eyes at any mention of IBM (IBM) - Get Report . On Silicon Valley and Wall Street alike, many analysts view "Big Blue" as the dying dinosaur of the industry. And yet, IBM constitutes the fourth-largest holding in Warren Buffett's Berkshire Hathaway (BRK.A) - Get Report . What gives?
As IBM gets ready to report second-quarter operating results on July 18, we explain why Buffett is right in considering the company the best value play available in the tech sector. Below, we also unveil an unconventional but proven method for making money that works in up and down markets.
You might have missed it, amid the financial media's obsessive coverage of the usual tech stock darlings, but Armonk, N.Y.-based IBM is in the throes of a quiet revolution with far-reaching consequences for the entire sector.
IBM last week in New York City officially opened its Bluemix Garage, an incubator for developers and entrepreneurial companies to build and scale enterprise apps. The facility is intended to act as an "innovation accelerator" to help the company find the next big thing. As a complement to these efforts, IBM has forged a partnership with Apple to develop industry-specific business apps running on Apple's highly flexible iOS operating system.
It's part of IBM's migration away from mainframes to value-added information technology and "big data" analytics. While sexy tech-intensive stars such as Amazon, Tesla, Apple, Oracle, Microsoft and Alphabet hog the headlines in The Wall Street Journal and on CNBC, IBM has been methodically reinventing itself to focus on business apps, the Internet of Things (IoT), medical IT and the cloud.
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One of the surest ways to reap profits over the long haul is to tap accelerating trends. Medical IT fits this description, and IBM's management knows it. IBM has been on an acquisition spree in the booming medical IT space, with more deals likely to come as health care as a whole continues to consolidate. Notably, IBM in February paid $2.6 billion for Truven Health Analytics, a health care IT firm that possesses data on the cost and treatment of more than 300 million patients. Truven is the fourth company that IBM had gobbled up since it created its Watson Health division last April. To date, IBM has plowed $4 billion into health care acquisitions.
In another strategic acquisition, IBM last year boughtThe Weather Channel's online business-to-business, mobile and cloud-based properties, in a deal valued at more than $2 billion.
IBM's purchase of The Weather Channel's digital assets seems like an odd choice, until you realize that the channel's mobile and web properties process seven times more volume than Google's search engine and claim more than 80 million monthly users. That makes the channel's data and access points extremely valuable IoT assets.
IBM is scheduled to report second-quarter results next Monday. The average estimate from analysts is for adjusted earnings per share of $2.88, down from $3.84 in the same quarter a year ago. Adjusted EPS in the third quarter is expected to be down as well, coming in at $3.31, vs. $3.34 a year ago. For the full year, EPS is projected to hit $13.49, compared with $14.92 in 2015. But the turnaround starts to kick in during 2017, when IBM is forecast to see adjusted EPS of $14.09.
Warren Buffett is the master of value investing; it's how he amassed a net worth in excess of $70 billion. Some analysts speculate that Buffett made a big mistake on Big Blue, but we prefer to think that the Oracle of Omaha knows deep value when he sees it. IBM's trailing 12-month price-to-earnings ratio (P/E) now stands at 11.7, extremely low compared with the P/E of peer Microsoft (40) and the industry (22).
It may take a little time for IBM's latest strategic moves to be reflected by gains in its stock price. In the meantime, investors can enjoy the stock's robust 3.6% dividend yield, which is very enticing in this era of low interest rates and paltry yields.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held stock in Apple and Oracle.
