IBM reports Wednesday
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...