Earlie: Re IBM
Sorry for the delay in responding to your post. I am six hours ahead, and felt it would be a good idea to check the numbers to avoid further grilling :)
>Go back over the last five or six years worth of IBM financials.
>You will find that the PEs were much lower
Pre-bubble, Historical P/E level (7/1/94 to 6/30/99) of IBM is 18.3x. thestreet.com
If we take this as a fair value measure (not saying it would be correct to do so, but since you have mentioned it...) So, at price USD 64.9 (where I last looked at it and advised against selling calls on IBM to my clients) IBM had a 2002E P/E of 16x >> 22% upside. At yesterday's close of USD 74.49, it has a P/E of 19x, 3.8% above historical pre-bubble average.
Again, I am not saying that the P/E is the one and only measure of valuing a company, just showing that IBM does not appear expensive according to this one measure.
>we watched as he moved the company into the "service" game
In my humble opinion, there was not much else Gerstner could do as his "premium" products got clobbered as hardware and relateds became "commodity" world over.
> what do you say about IBM's practice of selling off
>divisions and booking the incoming cash by reducing SG and A?
I believe the correct term is "aggressive accounting" – as in not illegal according to US GAAP, although I agree that it is a complete misrepresentation of core earnings and should probably be illegal.
I am not sure that this is a capital offense, though, as profits from assets sold are profits in the end. The crime here is that IBM is not booking them as extraordinary income but deducting them from SG&A.
>And your views on IBM's heavy use of pension fund assumptions
>to jazz up their reported profits? Good fundamentals or BS accounting?
IBM says its returns from the pension funds exceed the cost of servicing the plan, which is required by law to be added to earnings, although not under "operations".
I admit to not having personally checked whether IBM's statement that their returns exceed the cost of the fun is in fact true. Still, paranoias normally plaguing us market people aside, I have no reason to believe it is wrong, either – that's what auditors are for, I suppose.
Anyway, this was about 8% of IBM's pretax earnings in 2001. It should be less (estimated around 5%) this year, given the state of the markets and IBM's own trimmed expectations.
>Have you looked at IBM's tax rate nonsense?
>Think it won't enter the picture at some point in time to bite?
I was under the impression that IBM's tax rate has decreased from low –40%s to about 30% mainly through moving plants to locations with lower tax rates. That is perfectly legit, imho, but I do not claim to know everything about IBM's tax consulting.
I am not sure I agree with you that the low tax rates of IBM will haunt the company in some future, "in time to bite". It is unlikely that IBM's tax rate will go down any lower, and will quite possibly edge up in the quarters to come. Still, I feel this is one of the more innocent reporting practices of IBM.
>the $2.0 billion of primarily borrowed dough spent EVERY QUARTER (until recently,....
>when their borrowing ability finally ran out of steam) to hold the stock price up?
I see it for what it clearly is – boosting EPS through share buybacks. Unfortunately, it is not illegal. I remember vaguely some text book saying that it is perfectly legitimate for a company to borrow to do share buybacks if the cost-benefit to shareholders is favourable, but I am going to spare you (and myself!) from that, really...
Conclusion:
I am not arguing that IBM does not make use of financial levers to boost its bottom line. However, I am not as sure as you that:
1) This is a capital crime
2) IBM is singularly egregious in this respect
Given that IBM clearly engages in rather creative accounting, I agree that it should trade at multiples below its peers, since we are never so sure what those numbers actually are. The question is what value to assign to such a company. I would humbly suggest that EV/Rev of 1.5x and P/E of 15 is not expensive. Neither is it attractive for me. I also agree that IBM is not be growing into anything resembling an attractive investment opportunity in the near future. Hence, I am not buying into IBM.
If you recall, the reason for which I am being grilled right now is that I opposed the statement run-up in IBM is just plain ignorant given EDS, admittedly prematurely and in a rather unwelcome manner. All the points above are well-known to the market by now, so that they are no longer a reason to further depress IBM's share price. IBM's share price went down recently, it appeared to me, due to worries related to EDS. When the financial statements were announced, and the relation to EDS was severed, the share price rose.
Then again, I am a naïve, long-haired, blond girl who lives in Monte-Carlo, so maybe I am just talking nonsense to my betters in the few hours I have between the beach and the nightclubs. In the light of that significant probability, may I just eat humble pie and apologize for taking you guys for the chartists who populate most boards of SI, and who do not understand what you are talking about if it cannot be explained with a straightedge?
It is good to find this board. Let's restart on a better note. How about I promise to be deeper in my comments, and send a picture or two next week from the beaches of Monaco? :)
Regards,
Z.
P.S.: You forgot one other "financial lever" habitually used by IBM – downplaying the credit risk. Setting aside less than 3% of its total loans & unpaid bills (rather than the more prudent 4%), the company has inflated earnings by an estimated 4-5%. This could be a real problem in the future if the economy does not rebound. |
