In April 2012, we published an article titled, “What Does Warren Buffett See In IBM?” At the time we concluded the article with the following thought:
“…just imagine what IBM will look like after falling to a 52-week low.”
A reader of our article took exception to the idea of IBM declining in price with the remark:
“I have no idea why you think you could buy IBM on a 52 week low. There is nothing fundamental about the company that would lead one to think that might happen. IBM is a difficult company to short because people who own it primarily intend to hold it for a longer term, do not trade on margin, and do not sell their shares based on fear (Momintn. What Does Warren Buffett See in IBM? April 19, 2015. link.).”
Since our article, IBM has declined from $207 to $161 with upside movement being limited to $213.
In spite of the price decline of nearly –22% since 2012, IBM has increased the dividend by +53%. This has resulted in a situation where the price of IBM has becomes very compelling from a value perspective. As indicated in our original article on IBM, the growth of the dividend has become an overpowering force which is creating a stock that could eclipse all expectation for long-term investors. This leaves aside the topic of IBM share repurchases which Warren Buffett discussed in his 2011 shareholder letter.
Our premise of IBM’s valuation is narrowly perched on the work of Edson Gould’s Altimeter. Below is an update of Gould’s Altimeter since our April 2012 article.
According to Gould’s Altimeter, IBM is now undervalued below the levels of the 2008 low. We think that a value investor would have fun pouring over the data to determine the actual value of IBM. Gould’s Speed Resistance Lines [SRL] indicate that the conservative downside target for IBM is $130. However, we think a process of accumulation at the current price, and below, is a prudent long-term strategy.