Buffett Leaves His Comfort Zone

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Warren Buffett, that sneaky devil.

In a CNBC interview on Monday, the chairman and CEO of Berkshire Hathaway (NYS: BRK.B) revealed he's secretly been amassing a 5.5% stake in IBM (NYS: IBM) since March. Worth more than $10 billion, it's Berkshire's first big move ever into the technology space.

After a great third-quarter earnings report and the appointment of 30-year veteran Ginni Rometty as the next CEO, Buffett's buy, and therefore implicit approval of Big Blue's path, is icing on the cake for what most investors already know is a great company and stock.

Buffett praises IBM's five-year plan
In the past, Buffett has avoided the tech sector, claiming he didn't understand the companies or what they did well enough to make significant investments. But under current CEO Sam Palmisano, IBM has provided detailed disclosure of its future financial plans and goals. Apparently, this was the game changer for Buffett.

"I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM," Buffett said. Palmisano has stated that IBM intends to spend $20 billion on acquisitions between 2011 and 2015, and generate operating earnings of at least $20 by 2015.

The siren song of great quarterly earnings
Buffett's big IBM buy bodes well for a company that, by the measure of its most recent third-quarter earnings, is already doing quite well:

  • Net income rose a healthy 7%, to $3.8 billion.
  • The company's EPS of $3.28 handily beat Wall Street's expectation of $3.22.
  • Gross margin ticked up 1.2% to stand strong at 46.5%, trouncing peer Accenture's (NYS: ACN) 30.6% and Hewlett-Packard's (NYS: HPQ) 24.2%.

Total revenue did tick down a bit. The company took in $26.2 billion in the most recent quarter, down 2% from the previous quarter, a minor blip Buffett apparently isn't holding against IBM. 

A lesson learned from Apple
When CEO Sam Palmisano acquired PricewaterhouseCoopers' consulting business in 2002, he showed understanding that technology companies aren't about just the technology anymore, i.e., they're about providing customers with the total solution.

Ascendant CEO Ginni Rometty was one of Palmisano's top lieutenants at the time of the PwC acquisition, and was instrumental in planning the acquisition and integrating it successfully. This move by Buffett further vindicates Palmisano's strategy, which we can expect to see more of under Rometty. And that's a good thing for Big Blue.

Welcome to Big Blue, Mr. Buffett
IBM's stock has been on a steady climb since the market bottomed out in 2009, and is currently trading for around $187 per share. With a P/E of 14 it's reasonably priced. The company even pays a small dividend, and has raised guidance for the full year to $13.35 per share.

At one point, IBM teetered on the edge of irrelevance. Palmisano reimagined and reinvented the company. Looking beyond mere technology to the total customer solution took IBM out of its comfort zone and has led it to new and unimagined heights.

Welcome to Big Blue, Mr. Buffett. You've finally moved out of your own comfort zone and discovered what many investors have known for a long time. To follow IBM, or any of the other companies mentioned in this column, add them to My Watchlist, a free service of The Motley Fool that makes it easy to keep up with all the stocks on your investing radar.

At the time this article was published Fool contributor John Grgurich wrote most of his college papers on a beloved IBM Selectric with a quart of Wite-Out close by, but owns no shares of any of the companies listed in this column. The Motley Fool owns shares of IBM and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Accenture and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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