Stock Investors Don't Be Fooled: IBM Is in Big Trouble
Companies / Tech Stocks Oct 28, 2014 - 03:40 PM GMTBy: Money_Morning
Warren Buffett famously said at the height of the financial crisis that you only know who's been swimming naked when the tide goes out.
Some astute observers such as Stanley Druckenmiller, Doug Kass, and Fred Hickey, the editor of The High-Tech Strategist, have been warning for months that IBM's business and balance sheet were deteriorating.
The stock market, however, was happy to ignore these warnings and instead allow itself to be fooled by massive debt-financed stock buybacks that were propping up the company's shares.
The tide now appears to have receded, however…
IBM Earnings and Revenues Continue to Deteriorate
On Monday, October 20, IBM announced that it missed Wall Street earnings estimates by a mile, reporting third-quarter earnings of $3.68 per share versus the $4.32 that analysts were expecting. Third-quarter revenue was $22.4 billion, far short of the $23.37 billion consensus and its lowest showing since the first quarter of 2009, during the worst of the financial crisis.
On a year-over-year basis, revenue declined by 5.6%, its worst year-over-year showing since the third quarter of 2009 when sales slumped by 6.9%. During the third quarter, all of the company's business segments and geographic regions showed weakness. The company also announced that it no longer expected to report $20 per share in operating earnings in 2015 and that it saw 2014 earnings per share coming down 2% to 4%.
The company also announced that it would be disposing of its microelectronics business to GlobalFoundries in a transaction in which it will pay GlobalFoundries $1.5 billion to take over the business. IBM will record a total charge of $4.7 billion to exit this commodity business as part of its effort to move toward higher value solutions and services.
The company said that it experienced a "marked slowdown" in customer buying behavior in September and noted that its results point to "unprecedented changes" in the IT industry. The latter comment suggests that IBM may be on the wrong end of secular changes in the industry.
However, the deeper problem is in how the company managed to keep its stock price afloat…
A Buyback Program That Backfired on Every Level
IBM is a case study in the type of debt-financed stock buybacks that have kept the stock market afloat during a period of slow economic growth. Since 2012, the company has borrowed an astounding $33.6 billion while repurchasing $33.7 billion in stock. During that period, the company's shares have rarely traded below $180, suggesting that the company was not buying low.
But then again, American companies rarely buy low when they repurchase their stock since they tend to be focusing on other things when their stock is cheap such as surviving difficult market or economic conditions.
Nonetheless, one has to question whether IBM could have invested some of that nearly $34 billion used to repurchase what will increasingly look like very expensive stock in something more productive… like high-growth businesses.
Instead, it is now saddled with a huge amount of debt that it is going to have to repay…
In the process, it has trashed its balance sheet, swelling its debt/equity ratio to 243% from around 60% before the financial crisis. As of June 30, the company's balance sheet looked more like a junk bond company than one of America's iconic brands with $17.5 billion of shareholder equity versus $42.43 billion of debt.
If you back out the $31.6 billion of goodwill on the balance sheet, shareholder equity is actually negative $14.1 billion. While some might argue that IBM is a software and technical services company that doesn't need a lot of tangible assets, comparable software companies such as Microsoft Corp. (Nasdaq: MSFT), Oracle Corp. (NYSE: ORCL), and Accenture Plc. (NYSE: ACN) have significant Tangible Book Values. Not only does the emperor have no clothes, he might not even be able to afford to buy a bathrobe.
IBM announced a series of restructuring moves to pacify the market but the market isn't buying what IBM is selling.
IBM stock was at approximately $162 in late day trading on Monday. The shares are now down 15% from their year-end price of $187.57 per share. No doubt the company will soon trot out Mr. Buffett to reiterate his confidence in its prospects.
Let's hope he remembers his swimming trunks. The sad truth is that IBM is a tech dinosaur and the meteorite has already hit the planet in the form of the cloud, mobile computing, and the Internet.
Source : http://moneymorning.com/2014/10/28/the-tide-is-quickly-ebbing-on-this-tech-giant/
Money Morning/The Money Map Report
©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com
Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.
Money Morning Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
