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Ted Berg, CFA  

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  • IBM: Big Transformation + Big Data = Big Returns [View article]
    I'll highlight the following issues with regards to the above post:

    1) IBM's gross profit ($) has increased from '08 to '11 ($46.7B to $50.1B). It's gross margin (%) has also increased over this period (44.1% to 46.9%). I can't comment on the validity of the source used by the above post, but I recommend using IBM's 10Qs, 10Ks and earnings releases.

    2) IBM's book value is not negative; it is $20.1B as of 4Q11. IBM's "tangible" book value, which subtracts the accounting value of goodwill and intangible assets, is in fact negative. The primary contributor to IBM's negative "tangible" book value is the value of treasury stock, which is a contra equity account (it is a subtraction in determining the value of stockholders' equity). IBM's treasury stock totaled $111B as of last quarter. This amount is subtracted to arrive at the $20.1B in stockholder's equity. Goodwill and intangible assets total $29.6B, so when this is subtracted from stockholders' equity, you arrive at a negative "tangible" book value. When a company repurchases common shares, then the value of treasury stock increases and the corresponding value of stockholders' equity (book value) decreases. This is obviously not a bad thing as long as IBM is repurchasing its shares at a discount to their intrinsic value.

    Further, book value is not as relevant when valuing IBM. IBM's operations are largely driven by assets which are not fully realized (or not realized at all) on the balance sheet. For example, the balance sheet does not include the value of human labor, which is a significant driver of IBM's market value (think of R&D employees, software programmers, service consultants). Software comprises 44%% pre-tax income, while services comprises 41%. Thus, 85% of IBM's business is driven by factors that are not that capital intensive, and hence are not really reflected on the balance sheet under GAAP rules. Tangible book value is more relevant when analyzing financial companies or when analyzing companies that rely heavily on fixed assets to generate profits (think of industrial companies as one of many examples).

    3) Refer to #2 on the relevance of book value for a company such as IBM. With respect to Warren Buffet and book value, Buffett's strategy is to purchase companies that trade well below "intrinsic" value. Book value plays a role in determining intrinsic value, but the significance of book value varies depending on the industry as noted above. Buffett uses the change in book value over time as the key metric to evaluate how BRK performs relative to the S&P 500, but BRK and IBM are too very different types of businesses.
    Feb 27, 2012. 04:48 PM | Likes Like |Link to Comment
  • IBM: Big Transformation + Big Data = Big Returns [View article]
    To follow on the theme in above posts on the value-add (or lack thereof) of IBM's service organization and its data analytics offerings, I'll add the following:

    1) IBM practices internally what it preaches to clients. Large multinational corporations can learn a lot in terms of improving operational efficiencies and market opportunities based on IBM's accomplishments over the past decade. Few other companies in the S&P 500 are in the same tier as IBM in terms of ROIC (the key metric to evaluate profitability, asset efficiency and shareholder value creation).

    2) Data analytics is not just about service consultants. IBM incorporates elements of hardware, software and services into an integrated package. Thus, IBM can build out the infrastructure for clients to apply data analytics internally w/o the help of consultants, or IBM can provide a complete solution including services. This complete package is in demand not only by small and medium size businesses, but by large corporations, and in particular by public sector clients, the latter which is a massive opportunity given current inefficiencies in gov't agencies and regulatory capabilities.

    Last month, I attended an industry panel at a conference that had nothing to do w/ data analytics or IBM (IBM was not present) and here are a few quotes from large corporation executives in response to what challenges they face...

    - General Electric: "We have massive [amounts of] data, but the issue is we don't know all of what we have - what is the value of the data we have."

    - Wal-Mart: "Now, [with] the enormous amount of data available, we know what's going on at a localized level. The key is to identify patterns at the local level". Here, WMT was talking about customizing inventories to meet different demand trends at each of its stores.

    - AT&T: A key "trend is the availability of data" for businesses to make better decisions.

    At the same conference, but a different panel discussion, a U.S. Department of Commerce official noted the necessity of investing in domestic infrastructure, not just roads and bridges, but technology, including "smarter cities" (her quote, not IBM's). A Cisco executive was also on this panel and he noted that CSCO's customers in emerging markets are focused on creating "smarter cities" (his quote, not IBM's). It seems clear to me that this is a big opportunity for IBM's data analytics and services organization.

    3) Data analytics capabilities and it's applications have increased dramatically over the past 5, 10, and 20 years. In other words, it's not your father's data analytics. Watson is a perfect example of recent advancements (and the integrated capabilities of hardware, software and services) for data analytics. Anyone who thinks Siri is a cool application (and it is a great consumer product), should take notice of Watson, which is Siri on steroids for business applications.
    Feb 22, 2012. 10:31 AM | Likes Like |Link to Comment
  • IBM: Big Transformation + Big Data = Big Returns [View article]

    I can't comment on Buffett's timing other than to say his traditional approach is long-term, not short-term market timing. IBM's future stock performance will be determined by its ability (or inability) to generate sufficient ROIC relative to its cost of capital. As I discuss above, I believe IBM can generate meaningful ROIC (and hence free cash flow) over a sustained number of years. This is the stuff that Buffett likes.
    Feb 22, 2012. 09:51 AM | 1 Like Like |Link to Comment
  • Doubling Down On Microsoft In Vegas [View article]
    I don't know TNGO well, but TNGO and Tango are two different subjects.
    Jan 17, 2012. 11:04 AM | Likes Like |Link to Comment
  • Doubling Down On Microsoft In Vegas [View article]
    Good point. Let me clarify. I am referring to Skype for WP 7.5. It was interesting that NOK's Lumina 900 was introduced without Skype (it uses Tango for video calling). I asked NOK and MSFT why, and answer was that a version for WP 7.5 is not available yet.
    Jan 16, 2012. 01:40 AM | Likes Like |Link to Comment
  • Drilling For Deepwater Dollars [View article]
    Some good points are made in the above comments, so I'll reply to a few of these.

    What about other drillers, such SDRL, DO? ROIC is key, particularly in capital intensive businesses; ESV and NE are best of breed here. Issue w/ SDRL is the balance sheet. DO is a smaller player (critical mass is key) w/ outdated fleet.

    With regards to the IEA's forecasting track record, focus should be more on the trend than the exact figures, and IEA is consistent w/ other bodies of research on secular trends in developing economies vs. developed. I believe in the secular trend.

    With regards to the cycle, the "handwriting on the wall" changes frequently in this industry. To stay on this theme, if the handwriting is already on the wall, then this factor should already be built into current stock prices since it's on the wall for everyone to see. I disagree that "valuations are less important" in this industry; valuation is everything. It determines what your total returns will be in the future. If you overpay today, you'll generate low returns in future and vice versa. Building in a sufficient margin of safety into your valuation analysis is a key component to minimizing downside risk and maximizing future stock returns.

    The comment on "what if" for Europe, India and China is an issue for all stocks, not just drillers. Margin of safety point from above also applies here.
    Dec 17, 2011. 12:49 PM | 1 Like Like |Link to Comment
  • Microsoft Will Remain the King of Cash [View article]

    With regards to the DCF assumptions, the model has a 15 yr explicit forecast with a terminal value thereafter. It includes different growth rate and margin assumptions for each operating segment.

    For the $43 price target scenario, the key assumptions are revenue (in aggregate) grows at a 5.8% CAGR over the next 15 yrs and EBIT margin averages 31.6% over this period (margins are much higher today, but fall to 28%). These assumptions compare to MSFT's prior 10-yr rev CAGR of 11% and avg. EBIT of 36%. The terminal value assumes MSFT only earns an ROIC equal to its WACC (9%), vs. a significant "+" spread historically.
    Aug 3, 2011. 10:52 AM | Likes Like |Link to Comment
  • Why I Like Noble Corp. [View article]

    why would your depr exp and capx estimates drop off so significantly in 2010 and thereafter? 2009 depr = $408M (as you show) and 2009 capx was $1.5B w/ 2010 guidance of just under $1B. Your depr and capx ests are significantly below these.
    Apr 27, 2010. 06:02 PM | Likes Like |Link to Comment