Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

3 Signs IBM Is in Big Trouble—and How the Company Masks It

Companies / Tech Stocks Aug 04, 2016 - 07:00 PM GMT

By: John_Mauldin

Companies

BY TONY SAGAMI : I got a lot of positive feedback on my recent column, “Anatomy of a Successful Short Sale.” It’s no surprise, though. Spotting failing companies is as useful and lucrative as uncovering hidden gems.

Now let’s put theory into practice and take a look at a stock that my subscribers are currently shorting.

That stock is IBM.


IBM recently reported its quarterly results. The see-no-evil analysts on Wall Street jumped for joy at what I think were terrible results.

What was so terrible? Here are the reasons why I expect this stock to fall.

Acquisitions to hide falling revenues

How about this: IBM has reported falling revenues for 17 consecutive quarters.

IBM pulled in sales of $20.2 billion last quarter. But that’s 2.7% less than a year ago and 25% lower than in 2011.

The weakness is widespread:

  • Global Business Services had revenues of $4.3 billion, down 2%.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services, and integration software) had sales of $8.9 billion, down 0.5%. 
  • Systems (includes systems hardware and operating systems software) had sales of $2 billion, down 23.2%.
  • Global Financing (includes financing and used equipment sales) had sales of $424 million, down 11.3%.
  • With all that red ink, acquisitions are the only way you can make yourself look good. IBM has bought 11 companies worth $5 billion so far this year.

In fact, it has spent more on acquisitions in the last 12 months than ever before.

The acquisitions have boosted the Q2 revenues of $20.2 billion by $400 million. So, the results would have been even uglier without them—a 5% decline instead of the current 2.7% growth.

Pro forma calculations and massaged profits

IBM reports its earnings on a pro forma basis instead of a GAAP basis (I wrote about this tactic in detail in this column). This way it can use “accounting magic” to prop up its pro forma profits.

IBM reported better-than-expected “pro forma” profits of $2.95, which was above the average forecast of $2.88. On a GAAP basis, those profits shrink to $2.61 a share.

Still, even those phony pro forma calculations are 25% lower than a year ago.

A cash hoard of borrowed money

IBM is proud of its cash hoard, which increased from $7.6 billion in Q2 of 2015 to $10.6 billion today. That cash, however, didn’t come from operating profits. It’s borrowed.

IBM had $33 billion of debt a year ago. The company took on $11.5 billion more and now owes a staggering $44.5 billion.

That $10.6 billion cash isn’t going to last long. IBM is burning through it. The company had $3.4 billion of operating cash flow in Q2 but spent $5.9 billion on:

  • $1.0 billion on capital expenditures
  • $2.8 billion on acquisitions
  • $1.3 billion on dividends
  • $800 million on share repurchases

That’s $2.5 million of negative operating cash flow. Only IBM’s debt makes it possible. It’s a big warning sign of a company in trouble.

By the way, competitor Infosys warned that Brexit could hurt its business. IBM, however, adopted the see-no-evil defense: “Brexit didn’t help, but from everything we’ve seen we haven’t changed our view,” said CFO Martin Schroeter.

I think that IBM’s day of reckoning is near…

Subscribe to Tony’s Actionable Investment Advice

Markets rise or fall each day, but when reporting the reasons, the financial media rarely provides investors with a complete picture. Tony Sagami shows you the real story behind the week’s market news in his free weekly newsletter, Connecting the Dots.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in