Last year, self-proclaimed technophobe Warren Buffett announced that Berkshire Hathaway (BRK.B, BRK.A) had taken a position in International Business Machines Corporation (IBM). We can understand why if Berkshire was going to begin to allocate assets towards the technology sector, it would begin with IBM. As everyone knows, IBM was the once-great computer company that was revived in the 1990s by Lou Gerstner. While IBM may have lost the PC war, its reorientation toward the Internet and strategic IT Services and Solutions helped the company get its groove back. We don’t understand why the SEC and other organizations engaged in Industry Classification include IBM as part of the computer and office equipment industry when it sold off its personal computer business to Lenovo in 2005 and it only generated 15.83% of its YTD 2012 revenue from its Systems and Technology division.
IBM generates the lion’s share of its revenue from technology services and software and we believe it should be compared against other preeminent technology consulting organizations like Accenture (ACN). We compared IBM against Accenture in September and although we concluded that Accenture offered a slightly better opportunity than IBM at the time, IBM stacked up pretty against Accenture. In short, we can see why Buffett tried to keep it a secret last year.
IBM is a multinational corporation and like all the multi-nation corporations that have reported results, the company has seen headwinds to growth and performance thanks in part to the strong U.S. dollar. A weak dollar helps boost company bottom lines because the strong foreign currency translates into more U.S. dollars received on foreign operations and a strong U.S. dollar results in the opposite effect. IBM’s Q3 2012 revenue declined by 5.4% due to the weak macroeconomic environment as well as currency headwinds from the stronger dollar. On a constant currency basis, IBM’s revenue only declined by 2%.