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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • IBM: Correcting Misinformation Created By SA Contributor Josh Arnold

    Let's start with the correct information. I prepared it from the company's financial statements.

    Now the erroneous information, from Mr. Arnold's article:

    IBM has retired about $45 billion worth of shares for $70 billion in recent years.

    International Business Machines (NYSE:IBM) has not retired any shares. Retiring shares has a specific meaning, and should be differentiated from holding them in treasury, which is what IBM does. The accurate information: IBM spent $70 billion to reduce share counts by 412 million from what they otherwise would have been. Those shares would be worth $66 billion at a recent price of $160.59.

    What he forgets to mention, or overlooks, in his haste to disparage the company, is that IBM issued 88 million shares as part of employee stock compensation plans. As shown, they were issued at prices less than market. The difference may be considered as employee compensation cost, and amounts to $5 billion.

    More erroneous information:

    The share count, since 2010, has been reduced from 1,287 million to 1,010 million, an eye-popping reduction of 21.5%.

    The relevant information, matching the share count reductions with the years during which the $70 billion of buybacks occurred:

    Mr. Arnold, to arrive at his count of 277 million, uses average shares outstanding during 2010 and 2014. The effect is, he only uses four years instead of five. The use of the hyperbolic adjective "eye-popping" adds nothing to the rigor of the analysis here. The actual reduction, as demonstrated in the spreadsheet, is 315 million shares. Not shown, 9 million shares were bought back as part of employee compensation plans.

    The Long Term View

    As a simple method of looking at buybacks over the long term, I advocate dividing the cost of treasury shares by the quantity as reflected in the most recent balance sheet. That amounts to $123.06 per share, as of the 2014 10-K.

    It should be noted that treasury shares don't receive dividends, and continuing shareholders reap the benefit in the form of more funds available for current dividends.

    Finally, at a forward PE of 9.6, shares are underpriced by most conventional metrics. Investors who believe Mr. Market is in error will not blame management for that gentleman's idiosyncratic valuation methods.

    Abuse of Adjectives as a Substitute for Analysis

    In addition to the "eye-popping" noted above, the article also features "staggering, enormous, incredible and unbelievable." That doesn't add anything: it simply masks the inaccurate math.

    A Digression - Quality of Articles on Seeking Alpha

    I believe that articles that present incorrect information as facts, and misuse terms that have specific meaning in the financial sphere, are of no value to subscribers. The use of hyperbolic adjectives is simply a further irritant.

    Tags: IBM, long-ideas
    Mar 27 2:31 PM | Link | 17 Comments
  • Reacting To California Resources Earnings Conference Call

    The transcript for California Resources (NYSE:CRC) 4Q 2014 earnings conference call is now available. The following points emerge:

    • Hedging is in place through the end of the 3rd quarter.
    • The stock responds to Brent pricing: R2 is in the 80's.
    • Capex can be done from current cash flow sufficient to maintain production at current price levels.
    • Covenants in their bank credit lines are in the process of being modified by a 24 month waiver.
    • The capital structure (debt) was fine at $100 oil: if $60 Brent continues indefinitely deleveraging will be required.

    Oil prices are up substantially from their low point. I've been investing on the basis that WTI (and Brent with it) will return to $100 more rapidly than the market expects. That hypothesis has led to fine profits and I will be continuing along the same lines.

    Valuation and Trajectory

    Morningstar maintains a $17 price target for CRC, based on oil following the futures curve and eventually reaching $90. I think you might need $100 oil to drive a $17 share price.

    In the interest of simplicity, I'm guessing that every $1 increase in the price of Brent will drive CRC shares up by 25 cents. Allowing 4 years to reach the $17 target, annualized gains will be 25%. The reward here is well worth taking some risk.

    Assuming the waivers are completed soon, CRC can tread water for 2 years if oil prices stay where they are. While I regard that scenario as unlikely, I don't want to be around if it plays out that way.

    Swapping Shares for Options

    After studying the options chain, I'm planning to sell my shares and buy the CRC Aug 2015 5/9 vertical call spread in a slightly larger amount. That limits my downside risk, while preserving considerable upside from a recent price of $6.70.

    Having taken profits by paring my position 20%, swapping the shares for options will leave me with my entire initial investment in my pocket, so as to be playing with house money going forward.

    Tags: CRC, Energy, Oil, Options
    Feb 20 9:00 AM | Link | 4 Comments
  • Going Long Wal-Mart

    Wal-Mart (NYSE:WMT) is going down today on the combination of raises for minimum wage employees and less than expected guidance.

    On a PE5 basis the company is very cheap compared to the S&P 500, and trades at a much lower volatility.

    My take: poor employee morale and lack of ability to select associates has created operational difficulties that will be resolved by paying that little bit more. When last I looked at the company I was encouraged at the indications they would be investing in their associates. Now they are doing it, to include education and training.

    I bought Sep 77.5 calls and sold Sep 82.5 calls, to either make a profit if the stock stays above $82.50, or to reduce my cost basis if it goes below that level.

    Tags: WMT
    Feb 19 10:39 AM | Link | 11 Comments
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