Barron's Online: Critical of IBM's Earnings Quality
Barron's Online is running a good article about IBM's infamous accounting gimmickry and related earnings-boosting tactics called "Think Twice About IBM's Earnings."
When IBM reported its first quarter results two weeks ago, we noted that its results were not as solid as they appeared on the surface, since "had it not been for acquisitions and currency related gains, the tech giant's earnings would have actually been flat - not up 11% - during its latest quarter. In other words, when you strip out these one-time events, IBM actually missed the street's 80 cents per share earnings consensus by 6 cents, not the more innocent one cent miss of 79 cents that it seemingly reported yesterday."
Here are the key highlights of the Barron's piece:
- The Barron's piece notes that IBM's first quarter revenue was actually down 15% on a sequential basis and that its sales have now fallen for three consecutive years.
- The article also notes that IBM's "organic revenue growth" (sales growth minus acquisitions like PwC and Rational Software) likely declined 1%-2% last quarter, a far cry from the 11% sales growth number Big Blue touted in its first quarter results.
- IBM's first quarter cash flow declined 19% year-over-year and free cash flow in the most recent quarter was actually a negative $1.5 billion when one excludes from IBM's cash flow total its lower receivables and interest rate swaps for the period.
- Big Blue is trading for almost 6x book value, compared to less than 4-5x book values for Microsoft (MSFT), Intel (INTC) and Cisco (CSCO). It is also trading for a 10% premium to the S&P 500, although it historically sells for a 9% discount to the market.
Here's the core of the continued bear case on Big Blue:
No/slow growth, premium multiple, big cap stocks like IBM are in for a sustained period of market underperformance. Indeed, IBM currently trades at a PE of nearly 20x 2003 earnings expectations, even though the company only managed to post low single digit top line revenue growth throughout the great late 1990's tech boom (EPS gains at IBM were largely driven by financial engineering).
Further, IBM will face margin and pricing erosion as low cost computing/software alternatives proliferate and IT spending budgets continue to wane. |
