rolatzi, fleckenstein's comments on ibm yesterday
in yesterday's fleckenstein rap here is what he had to say about ibm and microsoft revenues and valuations.
Mature Behemoth Seeks Like-Minded Lady For Meaningful Market Caps And Night Caps
Turning to IBM and Microsoft for a moment, I think it's important to point out the real problem with these companies -- their stock prices are just too high. In Microsoft's case, it's obviously got a monopolistic position in operating systems, and that affords it quite a nice luxury. But at the end of the day, a company with less than $30 billion in revenues cannot support a nearly $400 billion market cap. That's about 12 times revenues and about 40 times earnings for a company whose growth has slowed, a fact that is not surprising, given the size of its revenues. MSFT should be valued more as a mature growth company, one that obviously has great profit margins in some aspects of its business. The more consumer-oriented part of the business -- and here I am referring to the new thrust in the Xbox -- lacks the same profit margins. Down the road, software titles may have those nice profit margins, but at the moment, the Xbox costs money to gain sales. So, that's why the stock is susceptible to lowered guidance, such as we saw last night. The earnings numbers were pretty much in line, but when a company that has such a high valuation stubs its toe, the stock is taken down.
Rip Van Gerstner
We skip now to our Lou of IBM, whose business poses quite a different issue. IBM basically experienced no revenue growth during the biggest technology boom in history. At the end of 1996, they had about $76 billion in revenues, and at the end of last year they had about $86 billion in revenues. So, in essence, the company added $10 billion in revenues during the aforementioned boom. That's about 13% and it annualizes out to about 2.25% a year. I know they had some divestitures, but they also had some acquisitions. The company sells at about 3 times revenues, but they also have about $18 billion in debt. Their earnings growth has been helped by a lot of special non-recurring factors. They've bought in a lot of shares. They've lowered the tax rate. They've potentially been the beneficiary of optimistic assumptions on their services accrual rates. The assumed growth for their pension plan, which has benefited them in the past, is too high for the current environment. So, going forward, I think those things will be an impediment.
Slice The Price, Whisk The Risk
I believe a reasonable valuation for IBM would be about $60 at best. This, of course, is about 50% lower than last night's price, but it would still value the company at about 1 times revenues. More importantly, it's higher than where IBM traded at the end of 1996, when it had the $76 billion in revenues. That year, the stock closed at around $40, but it had been as low as the mid-$20s during the year, and it probably averaged about $30, still a generous valuation for not much improvement in revenue growth. In any case, I consider the company to be dramatically riskier now than it has been in the past because of the maneuvers it's taken to bolster its earnings.
The Bigger They Assume, The Harder They Shortfall
While I haven't had a chance to take at look at where IBM's pension plan stands, we can probably go to school a little bit on what happened at General Motors, which yesterday announced that their pension plan was down 5.7% last year, instead of up the 10% expected in its "assumed rate." That was a $9.1 billion shortfall, quite a swing from the $1.7 billion surplus they had at the end of 2000. IBM is in a similar predicament, I would think, because they too have the same aggressive assumed rate of 10%, something that's not going to happen.
What's Black and (Big) Blue All Over? IBM's Top Line After A Numbers Beating
So, I believe IBM is a very risky security, and that's why I have been pounding the table for people to be aware of these facts. Last night's earnings were helped by a dramatic reduction in R&D and expense reduction in general, and a 4 percentage-point increase in their software gross margins. Given the fact that so many accounting miracles have been worked in the past, one has to be somewhat suspicious as to whether these may have been just for the benefit of making the quarter. After all, the revenue shortfall was over a billion dollars and follows on several such shortfalls this year.
Starve A Multiple, Feed A Margin Of Safety
To put a summation sign over it all, Microsoft has a much better business than does IBM, but it is dramatically overvalued at 12 times revenues, as IBM is dramatically overvalued at 3 times revenues. For whatever it's worth, there's a little snapshot of the ongoing overvaluation problem in America today. |
