IBM Bear's Den
by David Forrest ([email protected])

I often scratch my head and wonder why IBM isn't a core holding in the Boring Portfolio. I mean, if this isn't the biggest snoozer investment in the world, I don't know what is. All jokes aside about Big Black and Blue, this company has been an absolutely horrible investment over the last decade and from what I see, it doesn't look like IBM is going to offer awesome returns for investors anytime soon.

Still, the name "IBM" (or "the beamer" as Wall Street locals call it) elicits a somewhat dreamy harkening back to yesteryear. I was at my doctor's office the other day and a very sweet older woman was jabbering away about how she heard a friend tell someone that "you shouldn't buy IBM right now." Then, she proceeded to tell the receptionist that she once owned IBM back "before you were born" and that she should have held onto it. I felt like telling her that she should be glad she sold the dawg a long time ago. Afterwards, the doctor handed her a prescription for Halcyon and she was on her way.

These delusions of grandeur that investors indulge in with regard to IBM need to go away. I don't care about the good ol' days. It's 1998 and IBM isn't that attractive. For the past decade, revenue growth has been a lousy 3.1% per year. The stock has returned a pitiful 6.5% annually in the past 10 years despite the market returning close to 15% annually in the same period.

This horrible performance comes at the same time that IBM has bought back more than 20% of the company. Earnings are at the same level they were in 1990 despite the amazing technology revolution that we've experienced. Or should that be because of the amazing technology revolution that we've experienced?

Bottom line, IBM still makes much of its money through mainframe sales. It is getting hammered by the likes of Dell, Compaq, and others in the PC market. Its business is so scattered and unfocused that it makes you wonder what division of the company is going to fall apart next. Need a semiconductor, it has them. Need storage? IBM makes that, too. How about software or a network? Ditto. (Oops! That's Iomega.)

Doesn't "Big" Blue realize that small is beautiful and that the truly innovative businesses are run by hungry (generally younger) folks who are heavily compensated with stock options and whose sole existence usually focuses on making one product incredibly well? I guess not.

Now, some of you may be saying, "But Bogey, that's all in the past! What about the future? Isn't the future bright?" Well, I'm no Nostradamus, and I don't know exactly what's going to happen in the next five years, but let me ask you a few questions that might help you figure it out for yourself:

1. IBM's primary business is still in mainframes. Is market-beating growth going forward going to be found in:

A. Large clunky mainframes
B. Smaller personal computers

2. Who's going to win the war at any given competitive level?

A. The large behemoth that's so fragmented it doesn't know which end is up?
B. The smaller, niche companies who live and die by the success of the one thing they are intensely focused on?

'Nuff said.

Don't get me wrong. Despite the shots across IBM's bow that I'm taking here, it's still a very well-respected company and its professional services group is amongst the most respected in the high-tech world. The problem is that in order to offer market-beating returns, the company is going to have to beat the competition at various different levels. I don't believe it will win those mini-wars, much to the detriment of the whole company.

If I were IBM management, I'd break the company up into tiny little pieces, decentralize management (truly), and make each part of the business a stand- alone entity that will live and die on its own merits. Until then, the company will never have the focus it needs to produce market-beating returns.

Next: The Bull Responds