American Express Company (AXP), The Coca-Cola Company (KO), International Business Machines Corp. (IBM): Buffett’s 3 Largest Dow Positions

International Business Machines Corp. (NYSE:IBM)

International Business Machines Corp. (NYSE:IBM) beat second-quarter earnings estimates yesterday but missed on revenue and has lagged the Dow considerably this year. The Dow is a price-weighted index, which means that International Business Machines Corp. (NYSE:IBM), at nearly $200 per share, accounts for almost 10% of the index’s movements, acting as an anchor when it lags. Buffett began buying shares in 2011, citing strong financial management and impressive future benchmarks. International Business Machines Corp. (NYSE:IBM) sold its PC business to Lenovo in 2005, exiting the PC and hard disk drive businesses ahead of the recent PC sales slowdown, and has since focused on areas such as business analytics and cloud computing. This about-face in the company’s business model lends credence to its reputation as an innovator.

Buffett believes International Business Machines Corp. (NYSE:IBM)’s economic moat lies in its service component, as companies are reluctant to change IT suppliers. Furthermore, as companies around the world look to develop their IT departments, IBM’s trusted name makes it a strong candidate.

The company has also engaged in smaller software acquisitions, which, coupled with the firm’s strong distribution network, look promising for the firm’s bottom line. Taking new software to scale can be tremendously more profitable than hardware, because software’s negligible variable cost makes for high margins. Finally, the company has aggressively bought back shares over the past decade. IBM may have lagged the Dow lately, but it appears to be setting the stage for long-term profitability.

The article Buffett’s 3 Largest Dow Positions originally appeared on Fool.com and is written by Jake Keator.

Jake Keator has no position in any stocks mentioned. The Motley Fool recommends American Express and Coca-Cola. The Motley Fool owns shares of International Business Machines.

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