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IBM Chairman's Letter

|Includes: International Business Machines Corporation (IBM)

This morning I finally had the opportunity to read the most recent Chairman's letter from Samuel Palmisano, who had been the CEO of IBM before stepping down recently. He has done a remarkable job of converting a business that was focused both on the Enterprise and the Consumer, to a business that is at the forefront of technological innovation and information. They made the painful and earth shattering decision to unload their PC Business to Lenovo, and allocated a substantial percentage of revenue to R&D. Their software and services business provides them with long term contracts, which produce valuable recurring revenue streams. By exiting the PC Business when they did, they avoided getting caught up in the commoditization of the industry, and the evolution to tablets.

For the investor Palmisano has communicated honestly and openly about his plans for capital allocation, that only someone with a truly long term focus can do. He realized that by focusing on R&D to position the business for the future, he still would be able to return capital to shareholders through share buybacks and dividends. While revenue growth hasn't been remarkable, margin improvement has increased profits drastically, while stock buybacks at discounts to intrinsic value have proven to be extremely lucrative for shareholders. It is this laser like focus and honesty in my opinion that gave Warren Buffett the confidence to invest in excess of $10 Billion into the company in 2011. Currently the stock is fairly attractively priced in our estimation, but we feel there are better opportunities out there. On pullbacks IBM would definitely be a stock to keep an eye on.

http://www.ibm.com/annualreport/2011/bin/assets/2011_ibm_chairman_letter.pdf