Mike
Another Dorfman column built around the views of Earlie and you about Snakeoil Lou and Big Blue...
June 7, 1999 (JagNotes.com) -- IBM GROWTH
QUESTIONED: A SLIDE COMING?
The way I figure it, IBM (119 3/8) should pay me to write this report.
Or, if not Big Blue, then certainly an IBM shareholder.
Why so?
Because throughout my career, each time I do a bearish piece on IBM, about a
year later the stock invariably trades a lot higher than it was at the time of my
write-up.
In other words, I may have developed into a super contrary indicator when it
comes to the purchase of IBM shares—you buy the stock on my negative story
regardless of the price.
Given my bum record, you might well wonder why I'm back with another bearish
appraisal when the stock action clearly suggests that investors love the
company.
Maybe it's because I'm a sucker for a well thought-out contrary view—be it
positive or negative—when Wall Street pretty much holds the same opinion
about a given company.
Our IBM bear, who was the identified source for a report I did last Wednesday
on Micron Technology is Larry Woods, editor of The Tech Review, a well
regarded newsletter out of Stoney Creek, Ontario.
In January 1996, Woods notes, investors could have bought all the IBM shares
they wanted at a split-adjusted price of 23. Today, that same investor, he adds,
is paying nearly 120, or more than fivefold higher.
"Investors are bidding up the shares on sheer stupidity," he says.
He bases his argument on what he says is the paltry growth IBM has achieved
over the past three years and the "deplorable state of its current business."
Certainly, he says, IBM has not provided the kind of growth an investor might
expect to warrant the magnificent rise in its stock price in recent years.
Woods points out, for example, that since January 1996, IBM's annual revenue
growth has hovered around 4%. And over the same period, average annual
operating profit growth has fallen from 5.8% (1997 vs. 1996) to 0.7% (1998 vs.
1997).
As for IBM's impressive first quarter—a 42% per-share earnings gain on a 15%
rise in revenues—Woods contends the showing was anything but impressive if
you dig through the numbers.
He notes, for example, that the quarter was up against weak comparisons of the
year-earlier quarter.
Likewise, he points to such earnings boosters as a lower tax rate, reappearance
of "the same old dreary accounting activities," holding research and
development expenses steady (even though the company is technology
dependent), and repurchase of the stock by the truckload.
Meanwhile, he adds, "courtesy of a manic $2 billion per-quarter share buyback
program, the company's cash stash has systematically been looted (down $400
million during the quarter), while the debt load has expanded inexorably (up $600
million since December 31, 1998) and shareholder equity has fallen dramatically
(down $1.1 billion, or 6.6% in the first quarter alone)."
Woods also notes that company expenditures for stock repurchases frequently
exceed cash flow from operations. In the first quarter, for example, he points out,
cash flow totaled $1.8 billion, while share buyback costs exceeded $2.1 billion.
Continuing his negative assessment of Big Blue, Woods rattles off a number of
worrisome features about existing operations:
—The company can't make a profit on PCs.
—It's getting hammered viciously in disk drives and memory chips.
—Its high-margin revenues (especially maintenance) are slowly evaporating,
replaced by much lower and riskier service contract revenues.
—IBM continues to sell off assets, recently selling its global network to AT&T
for $5 billion. (Isn't this business, Woods asks, important to a computer and
Internet-related company?)
—Updated flagship computer sales continue to weaken, and new mainframe
product revenues have been disappointing.
—Server revenues are shrinking.
—Software gross margins have risen primarily as a result of lower levels of
amortization costs associated with previously deferred development spending,
or what Woods labels aggressive accounting.
—Margins across the company's hardware lines remain under pressure.
—Offshore sales are admittedly weak, and are expected to weaken further.
—Global financing revenues were down (3% year over year), and profits within
this sector rose only because interest expense have fallen.
Wrapping up his biting IBM assessment, Woods says he'll watch for signs that
the market is experiencing a "dawning recognition as to the degree to which it
has been had by blatant hucksterism."
Let me reiterate that IBM's sizzling stock performance is an unmistakable sign
that the market thinks Woods is all wet.
Given his dim, no-growth vision of Big Blue, I'm not surprised to hear Woods
tell me he would not own any IBM shares. And if he did, he says, he would
immediately dump them.
Growth, of course, may be in the eyes of the beholder. But according to our IBM skeptic, "Lo and behold, there is no growth to behold." |
