- IBM has been struggling for at least the past two years.
- In part because Warren Buffett is a major shareholder, IBM stock has held even despite steadily declining sales.
- Bloomberg Business Week is now pointing out IBM's problems.
Background: As a long-only investor, and thus not especially happily, I began promoting the idea that something was seriously wrong in Armonk when I realized it. My first article on International Business Machines (NYSE:IBM) came after Q2 earnings were released last summer, with IBM And The Media Attempt To Obscure Its Declining Business Results. In that article, my poster child for the media pumping/defending IBM's stock was Bloomberg.com. I criticized it for titling its earnings-related article positively. That title was:
IBM Raises Annual Forecast After Earnings Top Analyst Estimates.
But the quarter was actually a stinker, as I went on to demonstrate. I followed that article with several others, all stemming from the viewpoint that IBM shares were unattractive to new investors. However, I did not believe there was enough evidence for satisfied long term IBM shareholders to sell their stock. However, after another dismal quarter (Q1), recently I turned even more against IBM's stock, raising the more trenchant question of whether long-time IBM shareholders should desert Mr. Buffett in Same Stuff, Different Year: Should Shareholders Stick With IBM?
Well, it appears that Bloomberg News has begun to see things the DoctoRx way. They began to see the light, journalistically speaking, after Q1, with a mild article pointing out IBM's weakening financial position (no link). Today, Bloomberg (actually, Business Week, its sister publication) really had at it. Let's examine what they reported.
Discussion - Bad News Rising: The lede portrays CEO Rometty being rained on by a dark cloud that has singled her out on an otherwise clear day:
Photo illustration by 731; Photographs by Nigel Parry/CPI Syndication (Rometty); Mikehaywardcollection/Alamy (Cloud)
That picture sets the tone. The article is not a typical balanced one, though of course it is not a one-sided screed. It is mostly critical, but as I also believe, it shows that IBM has hope for a turnaround.
The article does show how far IBM has fallen in more than one way. One of the points is the main point I made last July and have made ever since. This is that unlike Apple (NASDAQ:AAPL), which has had some ups and downs, IBM has made a fetish of torturing its earnings presentations in unusual ways. Business Week points this out:
That phrase, financial engineering, is a catchall used by critics for the variety of ways IBM has made earnings per share go up even as revenue goes down. The spectrum of maneuvers starts with common practices like dividend increases and share buybacks, and extends to more esoteric tactics like designating major costs as "extraordinary" and devising ways to pay lower tax rates. The most transparent companies present their performance according to generally accepted accounting principles, or GAAP. IBM's 2009 annual report didn't use the phrase "non-GAAP" at all; the 2013 report used it 125 times...
"The most shocking thing to me is, Warren Buffett, who professes many, many times not to buy technology stocks, has picked the one that's got the single funkiest financial statements, and that's his area of expertise," says (William) Fleckenstein (who is short IBM). "I find that quite curious. He's Warren Buffett, and I'm not, but I don't see how you could look at this and feel anything other than uncomfortable."...
Near the end, the author states, speaking of IBM's core services business:
IBM's failure to foresee the changes in its own future makes it less plausible that it can accurately guide customers to theirs.
Earlier, the article goes into IBM's loss to Amazon.com (NASDAQ:AMZN) for a cloud contract with a rather picky customer: the CIA. The details, which I assume are presented fairly, were news to me and almost beggar belief. They go as follows and are an indictment of IBM's competence and awareness of such.
As Business Week tells it, IBM and Amazon were finalists for the CIA's business. IBM felt itself the favorite, but Amazon was chosen. IBM chose to take the government to court. Uh oh. Bad move. From the article once more:
In a court filing, Amazon blasted the elder company as a "late entrant to the cloud computing market" with an "uncompetitive, materially deficient proposal." A federal judge agreed, ruling in October that with the "overall inferiority of its proposal," IBM "lacked any chance of winning" the contract. The corporate cliché of the 1970s and '80s, that no one ever got fired for buying IBM, had never seemed less true. IBM withdrew its challenge.
As I said, it was no great surprise to me that Amazon won the award, and at a higher cost than IBM was charging, but for IBM to be viewed so poorly supports my view of a year ago that much has gone wrong there and that this represents a lot of self-inflicted harm.
Why has this been? I cannot know, but I'm reminded of the pre-bankruptcy General Motors (NYSE:GM). Fat and happy, and all that.
Remember, it took a tobacco executive to help save IBM from being broken up into its constituent pieces. Ms. Rometty is portrayed in the article as bright, competent, sincere, but relatively clueless about how serious the problems facing IBM were when she assumed the CEO position. That sort of damning with faint praise is problematic.
IBM has missed out on one of the great two-year runs in stock market history, having produced a marginally negative total return in the last 24 months.
They said it was all over for Richard Nixon when Johnny Carson turned harshly against him on the Tonight show. When you've lost Johnny, it was said, you've lost America. Is it possible that if and when IBM has lost Bloomberg Business Week, it's lost or is losing Wall Street?
Conclusion: In the 1980s, information technology among public companies consisted of IBM and everyone else. The IT world was pretty simple then. Value Line had, if I remember correctly, only one computer-related industry listing. Now there are all sorts of hardware and software categories, plus numerous thriving or aspiring but funded private companies. IBM has shrunk substantially relative to the IT universe, a fact its fans do not like to acknowledge.
I'd like IBM to succeed. My guess is that it will be helpful ultimately to shareholders if it stopped all share buybacks for a while and improved its operations, as the CIA and the judge noted when they judged IBM so harshly in comparison to the new kid on the block, Amazon.com. Capitalism is full of creative destruction, as we see from Hewlett-Packard (NYSE:HPQ) and other once-important high tech companies such as Sperry Rand and Digital Equipment, among a long list of names.
IBM can prove the short sellers wrong by rolling up its sleeves, adhering to GAAP first and foremost, spending cash not on its shares but on improving operations, and dropping the focus on non-GAAP EPS in favor of building a brighter future. That is the path I see that would attract me and many who would like to see the company become an example of profitable innovation once again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser. I also am a long-only investor.