Joel:
Let's look at some of the stuff that neither IBM, nor the analysts have dared to dig into.
Debt:
IBM is humping several tens of billions of dollars of debt (it is much higher than is generally acknowledged by either the company or the N.Y. analysts. Much of that debt is not easily assessed, as it does not appear where one would expect to find it on IBM's balance sheet.). Given the recent implosion of both revenues and (real) profitability, that debt is currently NOT serviceable, unless IBM dumps its share buy-back program. I suspect that the rating agencies have already warned IBM that it risks its current (undeserved) premium rating, unless it cleans up its act. Something has to give, and I would bet on a dumping of the share buy-back game. If that occurs, how quickly will the stock slide to a more appropriate mid forties price? Probably less than a few weeks.
Equally as worrisome, but also not discussed is what that debt servicing requirement does to any possible future ability to deliver real after-tax profits. Yes I know that "pro-forma" baloney is still accepted by the sheep, but the countervailing disgust with it is about to acquire critical mass and when it does, Gerstner-type accounting will be exorcised in a N.Y minute. I think we are very close to that point. Once we pass that watershed, IBM will have no alternative but to report quarter after quarter of extended losses. Hard to believe that the share price won't sink in Nortel-like fashion. "The bigger they are, the harder they fall" is never more accurate than when profits disappear..... for whatever reason.
Pension situation.
Sooner or later, IBM will have to get back onside with its pension situation. Initially this will require the adoption of a more realistic set of "assumptions". Once this takes place, pension fund "contributions" will replace the current pension fund "accruals",which represent a near term double thwack to the company's bottom line. As one might expect, this will likely come to pass at exactly the wrong time (probably this fall).
"Service Contract" Business.
What few investors seem have been aware of is the fact that the service contract scene has always been a relatively crowded and extremely competitive arena. Amazingly, Herr Gerstner somehow sold The Street on the patently mad belief that the replacement of IBM's traditional high margin business (hardware software and especially "maintenance") with low margin "service contracts" would not be destructive to IBM's bottom line. Few listened when IBM's competitors compained bitterly that IBM was bidding contracts at prices that could not possibly be profitable and that the company was booking fat fractions of these multi-year contracts in the early stages of same. To give Louis his due, for a while, he made it appear to be tenable. Of course, analysts should have tumbled to the situation when quarter after quarter, IBM's booked service sector contract revenues, oh so remarkably, expanded at precisely the rate that managed to just offset the imploding revenues garnered from IBM's other lines of business (what a coincidence). And of course, behind the curtains, the master magician employed his own unique brand of accounting legerdemain to maintain appearances, papering over the many cracks appearing in the company's financial status. Alas, the piper is now at the door. and even the least observant investor can now comprehend the depth of the abyss that prompted Gerstner's timely retirement from the top job.
Skeletons.
Currently many institutional investors are (finally) becoming cognizant of the fact that during his tenure, Gerstner has done little more than; (a) conduct a splendid accounting ruse, (b) hold the stock price up through an insanely expensive stock buy-back program (roughly $2.0 billion per quarter), and (c) sold hundreds of millions of dollars worth of personally held stock. In the current environment, once the stock price completes its trip to the canyon floor, a witch-hunt is probable. Gerstner will not dodge all the arrows that will come his way as this scenario evolves.
The "Tarnishing Effect"
As noted many times in the past, in a bear market, investment funds flow from the tarnished to the untarnished. Unfortunately, as this process matures, the relative rate of fund migration tends to speed up. IBM has already fallen precipitously over a relatively short period of time. Trend followers will not be blind to this acceleration.
Best, Earlie |
