Buffett’s Gain Wiped Out as IBM Abandons Earnings Goal

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Warren Buffett’s margin of safety just got erased.

The billionaire investor spent about $10.9 billion three years ago amassing a stake in International Business Machines Corp. and has since bought more. The computer-services company’s surprise announcement today that it was abandoning its 2015 earnings forecast caused the stock to plunge, lowering the value of Buffett’s holding by about $900 million.

“He usually tries to give himself a big margin of error,” said Cliff Gallant, an analyst at Nomura Holdings Inc., who follows Buffett’s Omaha, Nebraska-based company, Berkshire Hathaway Inc. “He must have believed that he was buying at a price where there was room for disappointment.”

IBM has struggled to transform its business fast enough as more customers seek to store data and software on cloud-computing networks, rather than on site. The shift has reduced the need for the company’s mainframes and servers.

Chief Executive Officer Ginni Rometty banked on a strong second half of the year, and instead faced weaker-than-expected software sales and lower productivity in services in the third quarter. Shares plunged 7.1 percent to $169.10 in New York, the lowest level since 2011.

Almost all of Berkshire’s holding was accumulated at an average price of $171.47, according to the company’s most-recent annual report, which showed the cost of that investment was $11.7 billion. Buffett had 70.2 million shares of Armonk, New York-based IBM at the end of June.

Revenue Slump

The investment was a departure for the billionaire, who has long said that he avoided buying stocks of technology firms for Berkshire because it was hard for him to understand their business plans and forecast their prospects. In April, after the company reported another quarter of revenue declines, he dismissed speculation that he had soured on IBM.

“That’s not true,” he told CNBC, according to a transcript on its website. “I have not been surprised by what they’ve reported.”

Buffett, 84, didn’t respond to a message left with an assistant today seeking comment. He has previously said that he wanted IBM’s stock to decline in the short term so that the company could repurchase more of its shares.

IBM is focusing on returns for investors who look beyond quarterly results, Rometty said today on CNBC. She declined to comment on her conversations with the billionaire.

Another Berkshire investment, Tesco Plc, has also faltered recently, prompting Buffett to reduce the stake. The retailer’s shares are down by almost half this year as it struggles to recover from overstated profit forecasts, lost market share and an overhaul of top management.

Cash Pile

Gallant said he’d be surprised if Buffett changed his thinking about IBM after today’s announcement. Berkshire had a stock portfolio valued at $119.2 billion at the end of June and a record amount of cash. Buffett has larger stakes in Wells Fargo & Co. and Coca-Cola Co.

Berkshire shares rose 0.2 percent today, and have climbed 16 percent this year.

“It doesn’t upset the apple cart in any way,” Gallant said of IBM’s slump. “Right now, I’d say the more pressing concern is that he’s got $50 billion of cash that he needs to deploy.”

(Updates with closing share price in the fifth paragraph.)
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