Why Warren Buffett's Goldman Sachs Stake May Mirror IBM

NEW YORK (TheStreet) -- Goldman Sachs  (GS) and IBM (IBM) have a lot in common right now.

Both firms are suffering from weak top-line revenue growth, they have spent years repurchasing shares in what has been a slower than-expected economic recovery from the 2008 financial crisis, and they are now both members of the Dow Jones Industrial Average. After Warren Buffett-run Berkshire Hathaway (BRK.B) converted a crisis-time stock warrant for Goldman shares in early October, both firm's also count the "Oracle of Omaha" as a top shareholder.

Thinking about Goldman Sachs and IBM's disappointing earnings results within the context of Berkshire's investment may help investors weed through short-term factors impacting both firms' quarterly earnings and long-term trends that may eventually play to the benefit of patient shareholders.

IBM has missed revenue and profit expectations for two of the past three quarters, while investors have generally discounted Goldman's better-than-forecast profitability in 2013 because results have been driven by legacy private equity investments and not the firm's core investment banking, wealth management and trading businesses.

In early Thursday trading, investors were selling shares in both firms. Sell-side analysts were also trimming their expectations for coming earnings reports. After an over 7% tumble, IBM shares now sit at their lowest level since mid-2011, when Buffett was building an over $11 billion stake in the IT services giant. 

However, before Buffett-watchers begin to question the acumen of the billionaire investor, they should remember he isn't banking on "Big Blue's" near-term share price performance. In fact, Buffett said in Berkshire's 2011 letter to shareholders he wouldn't mind if IBM's shares stagnated for as long as five years -- comments that likely raised a few eyebrows in IBM's C-Suite.

"I won't keep you in suspense. We should wish for IBM's stock price to languish," Buffett wrote in the February 2012 investor letter. In particular, Buffett said that as IBM set out on a $50 billion, five-year, share buyback program, he wouldn't mind an under-performance in the firm's stock.

If IBM's shares were stagnant, the company's authorization to buy up to $50 billion in stock would boost Berkshire's economic interest in "Big Blue" and give it an even more attractive claim on future earnings streams, Buffett said.

"If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly [through your ownership of a company that is repurchasing shares], you are hurt when stocks rise. You benefit when stocks swoon," Buffett.

Thank God IBM's earnings are suffering? Thank God the firm's hardware unit has turned to losses and sales in China are reflecting a significant slowdown in corporate activity? Kudos to Salesforce.com (CRM) and Oracle (ORCL) for trying to win IBM's data center customers?

Not quite.

As IBM continues to conduct its stock buyback, the firm will eventually need to return to growth. In particular, IBM will need to execute on its "Smarter Planet" and "Smarter Cloud" initiatives to build tens of billions of dollars in revenue from new data analytics and cloud computing businesses. No amount of share buyback will compensate from poor execution on the firm's strategic goals, especially in the ultra competitive technology industry.

Buybacks, however, are a predictable way for a firm like IBM and its investors to smooth out a transition process. If management executes, patient shareholders like Buffett will be rewarded.

Goldman Sachs faces similar challenges.

The firm is trying to adapt its business to a new regulatory climate that is cutting at the profitability of key trading businesses and is making overall earnings far less exciting. Goldman also is struggling to report growth in a lukewarm macroeconomic environment that is constraining the merger, IPO and financing activities of its biggest corporate customers. 

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