In last evening's post, "Hope? No Hope for Some: Requiem for a Russo", comments on IBM and its propensity toward financial engineering were made. This was made irrespective of a well-received earnings report, which drove the stock much higher today. Tonight, however, the WSJ is suggesting that perhaps it wasn't such a great quarter after all ("Closer Look Shows Little to Cheer at IBM"). Before providing our take on the quarter, a note: the IBM website makes it very difficult to find anything out about the quarter except the general press release. The website is very happy to discuss Calendar year 2007 and all 2008 quarters except the fourth quarter whose results sent the stock up so much in trading today, but it took a lot of clicking to find the detailed slide show presentation on Q4.
There are good reasons why IBM would want to hide it. Here is the link to the detailed discussion of the quarter. The key slides are 17 and 18. From end 2007 to end 2008, total assets declined by $10.5 B. Total liabilities rose by $4.1 B. Excluding the Global Financing balance sheet, debt/capital rose yoy from 30% to 49%. Over all, shareholder equity dropped from $28.5 B to $13.5 B, a drop of a cool fifteen billion dollars. Great year, guys! Keep on repurchasing that stock at premium prices!
Slide 18 shows the yoy explanation for the reported earnings growth (despite a sales decline) between Q4 in 2007 vs Q4 in 2008. Reported earnings grew from $2.80 yo $3.28/share. However, of that 48 cents per share improvement, 41 cents came from pension benefits and a lower tax rate. Another 15 cents per share came from share repurchases. As noted above, the company borrowed money to fund those repurchases. So, from operations, earnings per share declined.
IBM has moved decisively to focus on manufacturing reported earnings rather than computer gear that the world needs. In this they join Citigroup, BofA, General Motors, General Electric and many other behemoths that have lost their way. Anyone who owns IBM stock should, in my opinion, sell it. Whether it goes up or down is not the point. This is the worst of American capitalism. The leading computer company in the world hides the details of its quarterly report on its own website. It in effect lies about a great quarter which was really a not-so-great quarter. All us market vets can recall intermittent quarters in which IBM cheer-led a "Great quarter, guys" reaction and squeezed those shorts for about a couple of days. Then there is always a disappointment somewhere, for which there is always an excuse, for which there is always, like Scarlett O'Hara, another day, another quarter, another year, another way to steal its employees' pension funds, another way to manipulate the global tax system to engineer a favorable earnings reporting stream. This is likely to catch up to this company some day, some quarter, some year.
Switching gears, with regard to today's post on regulating stock sales ("Stocks as Consumer Items Needing Increased Regulation"), I had a conversation with a veteran of the global financial services industry. He suggested simply that all but qualified individuals should be prohibited from buying individual stocks, and that stocks should in some fashion be "marked" with a skull and crossbones. He also called me "Don". When I asked why, he said that I reminded him of Don Quixote, tilting at windmills. So, with apologies to Paul Simon, you can call me Don.
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