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IBM reports Wednesday

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April 12, 2008 – Comments (6) | RELATED TICKERS: IBM

The Dow is truly a crazy benchmark because it is only 30 stocks and the more a stock costs, the more weight in has in the performance, and if it splits, its weight declines to half.

StockMarket101 has pointed out that IBM reports earnings on Wednesday.  I have not paid too much attention to what stocks are in an index, but given that IBM has the most weight, I thought I'd take a look.

IBM has done a lot of buybacks.  It looks like they have almost 20% fewer shares today than about 6 years ago.   They have a market cap of $160 billion.  I dislike their price to intangible book value, 13.28.  They tripled their earnings in the past 6 or so years.  With the absolute garbage accounting methods these days I'd like to be confident that that is a good thing, but you can't take at face value that that is a measure of earnings from operations.  On the surface it looks good.  To really know if it is good would take me 20 to 30 hours of looking at the stock in detail.  I am interested, but not that interested.

Now, this is completely confusing and I am thinking, what's up with this BS?  Net income was $3.6 billion in 2002 and now it is $10.4 billion, so how come the EPS went from $3.07 to only $7.18 when the share count also went down from 1.7 billion to 1.4 billion?  It looks like in 2002 there was about $1.7 billion in extra items.  So, are earnings doubled rather than tripled?  That's what it looks like.

Debt is a monster, imho.   Long term debt was being paid back, but from 2006 to 2007 they added about $10 billion.  If the debt is long term it should not be a problem, but if it isn't they could see debt servicing charges go up significantly, as much as triple from the $285 million in 2007.  With current earnings that doesn't seem a problem at all.  How are they paying for the current $15 billion share buyback?  I think adding debt to do this now is a poor plan.  The company is stronger if they pay back their debt.

Goodwill went up $10 billion in the six years.  I hate fluff accounting.   Other intangibles are up more than another billion.  The increase in shareholder equity over the 6 years is only about half the fluff they added to the balance sheet.  With the share reduction I get about $13/share equity in 2002 to $20/share now.  Take off the fluff and you have just over $10 compared to $12.  That fluff accounting really makes a difference...

The buyback has the potential to reduce share count by another 10%.  They forecast only 5c increase in earnings from this, or about a half percent, so overall it looks to me that their real guidance is down about 10%.  I think they do have to expect income to decline, but is 10% enough in this market?

In this market I can't see businesses upgrading their systems.  This is an easy place to cut.  They have some great new technology potential, but I think they are still years from a marketable product based on it.

IBM has way more currency protection.

They are up roughly 20% on the year.  Do I think they've done something special here to justify more than that kind of increase in a year?  No.  Will they beat the S&P?  In the past year they have beat it by 30%.  That isn't sustainable and it may have over shot.  I think just like the rest of the market they will face a certain about of an earnings squeeze, increased input costs, inablity to raise prices.  Because of their international status they should be getting increases due to currency converstions.  The Euro is probably going to tank some relative to the US dollar because it is being held up with the same kind of Wiley E Cyote defiance of gravity.

I think the share buyback program gives this stock support, but I would not be a buyer.  I don't see how it goes up based on current fundamentals, but it isn't a bad place to be with the tattered state of the American dollar.  You get a hyperinflation and this one probably offers more protection than many.

The world is so screwed...  I am basing thoughts about whether this is a buy or not on the financial instability of the US dollar, not the fundamentals of the company...  

All things equal, I'd expect earnings to drop to about half, but the currency issues mean that earnings could grow.  At least that's my thoughts.  Go Zimbabwe... 

6 Comments – Post Your Own

#1) On April 12, 2008 at 11:07 AM, mandrake66 (81.75) wrote:

I worked at IBM for close to 8 years. I haven't peered at their info for longer than that, but essentially they've been a sideways-trading stock (with a center of about 100) for 9 years ("this quarter we're gonna party like it's 1999!" has been their theme song ever since).

They make their money off big hardware (mainframes) and consulting services. If you think either one of those things is going to hold up well in a recession, then jump on board. I think they'll be trading in the 80s again before long. IBM is not a growth stock, and their trading at about their high-point heading into (actually probably well into) a recession. I wish there were an ultashort IBM ETF. Since they're the most heavily-weighted DOW stock, it might be worth going ultrashort on the DOW.

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#2) On April 12, 2008 at 11:16 AM, mandrake66 (81.75) wrote:

eh, "their" -> "they're"

It also concerns me that they're still devoting so much money to share buybacks. I'm frankly amazed they have any shares left -- they've been buying back shares for as long as I can remember.

I imagine they do it mostly for their discounted employee share purchase plans, and the employees dump them back on the market as fast as they can. That's what I did when I was an employee. The main thing it shows me is that IBM still can't find a way to productively spend a large portion of its income.

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#3) On April 12, 2008 at 11:28 AM, dwot (60.71) wrote:

Yes mandrake, I'd be completely in that boat if it wasn't for currency differences, which I am not sure what to think about them.

The numbers around the US deficit growing are so incredibly scary, I can see the US dollar declining to half.

This scares me as to how much of Canada it takes with it.  Amazing the degree of good information you can find on the state of the US and people don't pay attention to it.  I've been keeping my eyes open for similar problems in Canada and either they just aren't there, or we have terrible reporting.  There are problems, but the deficit has declined in the period the US may have destroyed their currency.  We have a housing bubble that is more likely to take back from homeowners rather than investors.  Two problems I've found are our pension funds or "sovereign wealth fund" as the US describes it and the ABCP that came from the US with subprime mortgages that is currently frozen.  It is a one time hit of about $1000/person, so it isn't an irrecoverable hit.  The pension funds are about $4k/person and I think they will be toasted.  But the budget had wriggle room for a down turning economy. 

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#4) On April 12, 2008 at 12:11 PM, mandrake66 (81.75) wrote:

What about Canadian exports? I understood the U.S. to be your largest trading partner (and vice versa). I assumed Canadian exports would really be hurting, but that probably depends on the degree to which those exports are made up of oil, gas, and other commodities.

By the way, the small, private software company I work for in Massachusetts was just bought out by one from Quebec City about a week ago. So the U.S./Canadian connection just became a lot more real for me recently. I think a lot of American assets will be owned by foreigners in the near future. This happened in the '80s too if I remember correctly, the buyers back then being primarily Japanese. Look how well that worked out for them!

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#5) On April 12, 2008 at 12:58 PM, abitare (52.23) wrote:

dwot, 

US dollar because it is being held up with the same kind of Wiley E Cyote defiance of gravity.

LOL - great write up as usual

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#6) On April 12, 2008 at 2:10 PM, dwot (60.71) wrote:

I think Canada is stronger in exports than the US because we have far more needed exports, energy being a primary one.  Forestry is toast, but the US blocked forestry in the first place. 

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