IBM stock has spiked up Friday, yesterday and today because the Company released Q4 and full year earnings which “beat” the Street estimates – by design and by the heavy application of GAAP earnings management.
But here’s the facts: 1) Revenues year over year for the full year dropped 5.9%; quarter over quarter they dropped 1.3% ; this was the 5th year in a row of annual declines and the 19th quarter in a row of year over year quarterly declines; 2) gross and operating margins continue to shrink; pre-tax earnings (this is important) plunged, literally plunged, 22.7% for 2016 vs. 2015; 3) long term debt increased 3.5% year over year – it was 43.4% of revenues in at the end of 2016 vs. 40.8% of revenues at the end of 2015; 4) cash generated by operations (from the statement of cash flows) plunged 49.3% in Q4 2016 vs. Q4 2015 – it dropped 2.3% for the full year (see below for significance); 5) despite the heavy application fo GAAP management, net income dropped 10% in 2016, with a small quarter over quarter net income gain of 1%, which would have been a decline if IBM had not applied subjective GAAP manipulations.
With regard to IBM’s liberal application of GAAP earnings management techniques, the Company arbitrarily applied a 9.6% “effective” tax rate in Q4 2016 vs. the 12.5% utilized in Q4 2015. The Company claimed a 3.6% GAAP tax rate for 2016 vs. 16.2% in 2015. Manipulating the “effective” GAAP tax rate is the very first lesson taught in any high quality forensics accounting class. I give IBM an A+ for its maneuvers in this regard. But the “devil in the details” and fact that the cash generated from operations plunged 49% quarter over quarter should raise a huge red flag for any financial analyst (Wall Street pimps of course will turn a blind eye to that glaring financial “tumor”).
The stock popped today on IBM’s announcement that hit would hire 25,000 people in the U.S. in an obvious maneuver to avoid the stock-deadly “Trump tweet.” However, the Company has continued to maintain on analyst conference calls that the hiring is part of its normal operations and should not be differentiated from its cost-cutting layoff plans. But the hedge fund algos only care about the 25k hiring headlines.
Interestingly, IBM heavily promoted the success of its cloud business and artificial intelligence business, the revenues from which increased 13% in 2016. But this business can not be very profitable, otherwise IBM’s gross, operating and pre-tax net margins would not have dropped. This achievement is less than dubious.
Additionally, 20% of IBM’s revenues are derived from its global business services unit. As Trump escalates the trade war with the rest of the world, specifically China/Asia, this unit’s revenues, which dropped 4.1% quarter over quarter, will get hit even harder.
IBM is an American corporate dinosaur that is dying a slow, painful death from terminal business cancer. The Company has done well to survive this long. Amazon and Oracle have ignited a pricing war in the cloud space that will eat IBM’s cloud business alive. The cloud business is quickly become a highly commoditized product with no limit to capacity constraints and almost zero pricing power or real product differentiation. It’s quite similar to the fiber optic business that soared then crashed and burned last decade.
IBM’s current legacy, like most large corporations – US corporate debt has tripled since 2006 and is at record levels – is issuing debt to buy-back shares and skimp on payments into its pension in order to generate GAAP net income. It’s an American tragedy in the making. The stock market is historically overvalued now and is set up for a big sell-off, which I believe will occur this year. While the Dow and SPX have been flirting with record all-time highs, IBM sits 18.6% below its all-time high reached in 2013. It was IBM’s turn to be used as prop for today’s Dow rally, as IBM has been one of biggest contributors to today’s Dow gains. As I’ve shown above, there has been zero fundamental factors behind IBM’s stock move over the last three days.
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