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Office Hours: IBM Case Study

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After posting a new Tear Sheet on IBM in early April, 2018, one of Framework’s partners, Sheila Chesney, suggested that I create a running case study to show how we are analyzing IBM’s value and how we are using options to structure an investment in the shares.

These videos were made over two weekends, during which we invited non-subscribers to special Office Hour sessions. These videos are thus a little more simplistic than a Guided Tear Sheet, for instance, but offers a step-by-step look at the valuation and our thoughts about structuring.

We have split the videos into three sections: Introduction, Valuation, and Structuring. 32 minutes of content in all, divided over 10 videos.


Introduction

These videos introduce Framework’s perspective on valuation and structuring, and we touch on some of the issues facing IBM.

Framework’s Framework

Here, we talk about the dangers of “Salad Bar Investing” and why a framework is important.


Options Offer More Options

Buying stocks means that an investor must simultaneously expose themselves to two ranges: accepting risk and gaining from the potential for stock price movement. Options allow investors to split upside from downside and acceptance of exposure from the gain of it. Options offer more options!


Issues Facing IBM

Here, we introduce the main issue facing IBM today — a stagnant top-line — and what is at the root of this problem.


Valuation

Here, we talk a bit about applying the scientific method to investing, then take a look at each valuation driver in turn.

Investing Using the Scientific Method

The modern world is built on cash flow analysis. We combine these best practices with a cycle of setting forth a hypothesis about a company, measuring actual results, and revising the original hypothesis as needed.


Valuation Drivers: Revenue Growth and Profitability


IBM’s revenue growth is what it is, but one of the unsung positive tales in the IBM saga is that of its profitability improvement.


Valuation Drivers: Investment Level and Efficacy


IBM has been spending on building its Strategic Imperatives business, which we think holds promise. The success or failure of these businesses to generate cash flow growth in the medium-term is an important driver of IBM’s intrinsic value.


Valuation Waterfall


Here, we pull all our valuation driver assumptions into an intrinsic value range, and talk about which scenarios seem most likely given what we know about the firm.


Investment Structuring

These videos finish up the series, talking about our approach to portfolio management and how this approach has played out in this investment in IBM.

Portfolio Management Principles


An overview of how we think about portfolio construction.


Evolution of the IBM Position


Here, we show how we applied our portfolio management principles to the case of our investment in IBM.

Lessons