Buffett Buys IBM Near Peak, Echoing Bet on Coke

By Andrew Frye - Nov 15, 2011 3:20 AM GMT+0700

Berkshire Hathaway Inc. (BRK/A)’s Warren Buffett, who spent more than $10 billion on International Business Machines Corp. (IBM) stock, paid near-record prices for the shares, recalling his winning 1988 investment in Coca-Cola Co. (KO)

Berkshire began buying IBM shares this year after Buffett read the Armonk, New York-based company’s annual report and saw the firm “through a different lens,” the billionaire told CNBC today in an interview. IBM had doubled in New York trading in the 27 months prior to the Feb. 22 release of its yearly 10-K filing. Coca-Cola had doubled in the four years through the end of 1987, and has risen more than 10-fold since.

“I think he looked at Coke through a different lens back in 1988,” said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.” In IBM, “he sees a business that supports the world’s IT infrastructure and has a lot of room to grow over the next couple decades.”

Buffett, 81, acquired IBM shares as the stock’s increase this year prompted at least five analysts to remove their buy recommendations. IBM has risen 28 percent in 2011, the biggest gainer in the 30-company Dow Jones Industrial Average. (INDU) It is one of six firms in the index whose stock is recommended for purchase by less than half of the research shops that cover it, according to data tracked by Bloomberg.

IBM becomes Berkshire’s second-biggest holding behind a stake in Atlanta-based Coca-Cola valued at about $13.5 billion. Buffett, Berkshire’s chairman and chief executive officer, invested about $1 billion in the world’s biggest soft-drink maker by the end of 1989 and made purchases of almost $300 million in 1994.

‘A Behemoth’

“When he started to accumulate the Coca-Cola stock it was like, ‘Boy, this is very unlike Buffett because of the valuation,’” said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc. IBM “is a behemoth, compared to even where Coke was back then. But it is certainly a company that can grow.”

IBM climbed to a record on Oct. 14. Buffett said he acquired most of the stake in the three months ended Sept. 30.

IBM has 16 analyst ratings equivalent to hold, compared with 15 buy recommendations. Coca-Cola, which is also in the Dow, had 17 buy ratings compared with 4 hold calls.

IBM is focused on services businesses as it enters its 101st year, and the firm has targeted expansion in Brazil, India and China. Coca-Cola, the world’s biggest soft-drink maker, has boosted per-share earnings eightfold since 1989 by buying back stock and expanding in regions including China and the Pacific.

IBM’s Strategy

Buffett highlighted IBM’s opportunities to expand outside the U.S. and the company’s track record of executing its strategy. The $220 billion company is targeting operating earnings of at least $20 a share by 2015, from a projection of $13.35 for this year. IBM spent more than $100 billion on dividends and buybacks since 2003.

“They are thinking about the shareholders,” Buffett said in the televised CNBC interview. “They treat their stock with reverence, which I find is unusual among big companies.”

IBM appointed Virginia “Ginni” Rometty last month as its first female CEO. She takes over from Sam Palmisano, who increased earnings by steering the company toward software and services and disposing of some hardware businesses such as PCs.

Buffett drew down Berkshire’s cash and invested $23.9 billion in the third quarter. That included $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion.

IBM is trading at about 14 times earnings, compared with Coca-Cola’s 18 times, according to data compiled by Bloomberg.

“The ability to go out there and find distressed investments becomes a lot more difficult when you got to put $10 billion to work,” said Tom Lewandowski, an analyst with Edward Jones & Co. The IBM investment is “a growth play, it’s an emerging-markets play.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.