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naivesummer

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  • The Fed's Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund [View article]
    Well, the struggle many companies face, and IBM too is that the focus on stock price and Wall Street, reduce their ability to take risks and innovate. Amazon has received a free pass whereas if GE, Cisco and IBM had done the same i.e. lousy earnings and low margins, Wall Street would have killed them. But as far as jobs are concerned, there is misunderstanding of why jobs go overseas. Most people believe that jobs go overseas because people in India make less than US based folks. This is a huge misnomer and a lack of understanding of this issue. Conventional wisdom says jobs go overseas because labor based costs are higher in the US. Sounds simple but it is not. Assume for a moment that a SAP programmer who makes $100K in the US takes a 40% pay-cut immediately. Now the company cannot send that job overseas. It is not economically feasible. You will say true, but how will a programmer make do with $60K. Here is the subtlety in that argument. The programmer does take a 40% pay cut every paycheck after all his deductions are taken into account and all the other taxes he pays e.g. property, sales tax, gas tax etc. The most fundamental cause of job loss in the US is that our tax model, wherein over 90% of federal/state/local taxes are paid by individuals, is a defective model. That worked when the US was an island to itself. No longer. The new model needs to be 90+ % of taxes to be paid by business. Now most of the folks who read this will want to jump of this comment but hold on. Remember one thing, personnel taxes are in reality pass through business revenue. If you don't have a job you don't pay taxes. So what if we cut everybody's salary to their lowest take home possible and eliminate all forms of taxes on individuals. Companies will have an immediate reduction in employee based costs and yet the individual will see no change in take home income and hence buying power. The government will then have to find a new source of revenue for the loss of personal taxes. That is where it will have to institute two new tax models. The first a tax on business revenue and the second on business income. This will ensure that the government revenue is, in future, linked to the GDP rather than payroll, which is a shrinking base. This will stop the 'easy' corporate savings as jobs are shifted overseas. It will also reduce the amount of money corporations can hide overseas. US taxes linked to US based revenue and US based income. I have written a book about this "The 44th Presidency- A history of our economic future' wherein a 'fictional President' deploys new approaches to fixing jobs, social security and healthcare.
    Jul 21 02:06 PM | 1 Like Like |Link to Comment
  • The Fed's Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund [View article]
    Ah but you miss one point. If IBM did not buy its shares back it would have 1.8 billion in shares but also over $180 billion in case on its book which would mean its price would be close to or more than what it has now.
    Jul 20 07:01 AM | 2 Likes Like |Link to Comment
  • IBM: Turning Around But Overpriced [View article]
    "Now, IBM continues its laser-like focus on shareholder returns. IBM bought back $3.7 billion in stock." What return does buying back stock provide to a shareholder? The shareholder can get this from the market without the company having to buy it. Unless you feel that if they stop buying stock back the stock will go lower?
    Jul 20 06:35 AM | Likes Like |Link to Comment
  • The Fed's Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund [View article]
    If only IBM stock, in the last couple of years, had gone up as a result of the buybacks one could have said it 'helped' Wall Street. Here is another data point which you may find as interesting. In 1999 IBM's market cap was $192 billion(wikinvest). After 15 years it is around the same. No change. But by 2015 (1999-2015) IBM will have spent (with some imputed interest) around $220 billion on dividends and share buybacks. Enough to, at even today's high prices, buy SAP, EMC and a few other companies. I wonder if Buffet is really smarter in that his stock pays no dividend and he doesn't buy it back. Preserving his cash to buy companies -:). Wall street to me is a python around companies neck. It can guarantee nothing, bullies companies and forces them to make sub optimal decisions. It is my humble opinion that by the middle of the century a lot of the major companies will buy back their shares and hopefully(perhaps 'naive' of me) become employee owned companies (letting employees and charities benefit from the profits) once again perhaps naive of me to think that. Here is my reasoning. Stocks are essentially a flawed asset class. Just to deliver an 8% return(excluding dividend) the market will have to be at 34,000 by 2023, 68,000 by 2032, 136,000 by 2041 and 272,000 by 2050. Even if the nominal prices get to those levels, the overall market cap of the companies will not get to similar multiples. There isn't enough cash from personal savings and/or new pension money coming in to do that. Consequently the pension funds will by-pass Wall Street and force companies to, in a measured manner, provide 'guaranteed' returns and buy the stock back over an extended period of time.
    Jul 19 10:35 AM | 4 Likes Like |Link to Comment
  • Is IBM Overvalued? [View article]
    Can any analyst do the following analysis for peer companies IBM, MSFT, CSCO, HPQ, etc. which shows at 6% total return how long would it take them each to buy all their share back from the free cash flow generated. These are all mature companies and not headed into any major revenue/profitability/... flow growth. I used IBM market cap at $192 billion, free cash flow $14 billion (assumed all dividend would be stopped and a 6% return 'guaranteed'). It appears IBM could buy back all its shares in 29 years. To me that would be a good way to see if IBM is over or under valued.
    Jul 19 10:05 AM | Likes Like |Link to Comment
  • IBM Running Out Of Easy Ways To Keep The Shareholders Satisfied [View article]
    Fair point. However, the mainframe as the 'disruptive' Trojan horse has a very unique position and a competitive advantage that is unlikely to be threatened for some time. So yes, while there is still time to make it the workhorse (OK no more horse analogies) of the cloud infrastructure IBM will have to move on this sooner rather than later. The ideal would be if IBM can blend the mainframe with its new thoroughbred(oops sorry) Watson to go back to its future and create the 'lights out' data center but this time a filly 'unmanned' one.
    Jul 4 09:24 PM | Likes Like |Link to Comment
  • IBM Running Out Of Easy Ways To Keep The Shareholders Satisfied [View article]
    You have a lot here that is food for thought. However, the one point you may want to rethink is the statement around the mainframe coming under threat from the cloud. The mainframe in effect is ideal for the cloud. One of these days IBM will develop 'containers' that can run other OS on the mainframe seamlessly. This will give it the kind of competitive advantage others do not have. The beauty of the mainframe is it is a beast, robust, with massive throughput, able to create large number of virtual machines and requires far less folks to support. That is what the cloud is all about. IBM is not there on this and if it can crack this nut it will be king of the hill in cloud.
    Jul 2 11:13 AM | 3 Likes Like |Link to Comment
  • IBM: Getting A Good Return? [View article]
    I would use the highest rate being paid, since that is what would have been retired first. Here is an interesting data point. In 1999 IBM's market cap was $192 billion. When your article came out the market cap was $186 billion. But here is the fascinating part. By 2015 IBM will have spent close to $220 billion(with some imputed interest) on buybacks and dividends. Had it done what Warren Buffet does ( no dividends or buybacks) IBM would have an extra $220 billion on its books. Enough to buy SAP, EMC and a bunch more. These acquisitions would have been enough to crush the 2015 road map even with the 1.8 billion in shares in 1999.
    Jul 2 08:03 AM | Likes Like |Link to Comment
  • IBM: Getting A Good Return? [View article]
    Have you added the cost of funding the $45 billion in your calculation. They may not have paid dividend but would that not have to be netted against the cost of funding of the buyback debt?
    Jul 1 06:37 AM | 2 Likes Like |Link to Comment
  • IBM May Be Selling At A Bargain Price [View article]
    For a moment let us look beyond the next couple of years. Given stocks are supposed to be a long term investment here is my question. IBM today is around $ 98 billion i n revenue and will most certainly reach its $20 target next year. Where do you see the company ten years from now? Revenue, profit, EPS, cash flow, dividend but most importantly product/services mix and how. Will it get to $125 billion in revenue by 2025 and if yes, how?. Will it be at $35 billion in FCF and how? What part of the $125 billion will be HW/SW/Services and the margins?
    May 23 08:57 AM | Likes Like |Link to Comment
  • The Bull Case For IBM [View article]
    Lester as always very interesting analysis. you say:

    "Thus, I project that IBM's total revenue will increase by approximately 3.5% year-over-year from 2015 to 2019. In other words, IBM's total revenue is projected to increase from $110bn in the year 2015 to $127bn in the year 2019."

    Lester, the last I looked, IBM's 2014 revenue was at a $98 billion pace, give or take a few. So I am curious where you are getting a $110 billion revenue number for 2015. I love the thought of IBM being at a $127 billion in revenue. Do you see this happening through organic growth and/or acquisitions and if acquisitions what kind do you see, that can get IBM to $127 billion in revenue and how much do you think IBM will have to spend on these acquisitions? Would it be in cash and/or through use of treasury stock(which could both dilute earnings).

    I am also wondering if you are actually a bit light on valuations if the $127 billion is reached. You project expenses as a percent of sales to remain same. That doesn't appear very logical. With that kind of revenue base shouldn't the expenses grow at a much slower rate to provide economies of scale and provide enormous positive margin boost.


    May 1 07:21 AM | 2 Likes Like |Link to Comment
  • IBM: A Decent Q1 But Worse-Than-Expected Outlook [View article]
    60+% of IBM's revenue comes from services consulting and infrastructure support. Both of these have extensive competition, and as they move into these domains more aggressively (not concerned about 'high margins'), they will put a downward pressure on profits and revenue. IBM's most defensible margins are in the mainframes and its software suite. The mainframe is a small part and has low likelihood of growth unless it becomes the bedrock of cloud and software margins while 'protectable' have low growth rate and ultimately will also have competitive pressures. Very few software out there has no competition. I too am not a great believer in earnings but ultimately in FCF/S as you point out. The day that starts to erode there will be a problem.

    My question is can IBM come up with innovation that its competitors cannot match either because it is too expensive and/or requires skills which they do not have. That in my mind will ultimately decide IBM's future. If Watson turns out to be as promised then it could help, provided IBM does a land grab before others come up with their own Watson.
    Apr 21 06:38 AM | Likes Like |Link to Comment
  • IBM: A Decent Q1 But Worse-Than-Expected Outlook [View article]
    First of all I am not sure how one should value stocks. It is clearly not a mathematical calculation notwithstanding the hundreds of millions spent on technical analysis. So let me get down to some very simple questions for you. What do you believe are the 'high margin' businesses IBM is moving towards and why do you believe it will, not only be able to move into them, but be able to sustain the high margins for the near future. Whenever I hear of a company's desire to move into high margin businesses I am reminded of Michael Porter (the guru of corporate strategy) who very simply stated that high margin's result from either superior and/or unique products(i.e. not commodities) that can retain their superiority or state sanctioned monopolies. Given IBM does not have a monopoly in very many areas(mainframe being one) and state sanctioned monopoly not in the offing which do you consider to be unique products that will generate the high returns and be able to sustain them till new ones are found. And how much do you feel will be the profit and revenue from these high margin businesses.
    Apr 20 11:13 AM | Likes Like |Link to Comment
  • IBM's Innovation May Trigger Revenue Growth [View article]
    I had at one time done a back of the envelope calculation but since I do not have the tools and database that you have I am a little skeptical of my analysis. Here is what I found. In 1999 IBM's market cap was $192 billion with 1.8 billion shares outstanding. This year at the low point when the stock was at $172 and 1.1 billion shares outstanding market cap was actually below the $192 billion. I wonder what Oracle's and Berkshire's market cap were in 1999 and now and what they have spent on dividends and buy backs. Also I think by 2015 with imputed interest, IBM will have spent about $220 billion of its FCF on dividends and share buybacks(my rough estimate, could be wrong). If that had not been done, IBM would have $220 billion on its balance sheet: enough to buy SAP, EMC and perhaps some other top notch tech companies even at today's lofty market caps. I just was not able to combine the balance sheets and income statements of the potentially 'acquired' companies, under this strategy, to come up with a merged balance sheet and income statement. As you can surmise I am very skeptical of dividend payouts and stock buybacks as a corporate policy. They tend to waste FCF which could be spent much better.
    Apr 13 12:16 PM | Likes Like |Link to Comment
  • IBM's Innovation May Trigger Revenue Growth [View article]
    Alex here is a suggestion. If you have the time and can do the following analysis it may give you an interesting perspective on IBM and its strategy. The information is all available in public.

    What if IBM had followed Warren Buffet's approach: no dividends and no share buy backs.

    What if since 2000 IBM paid no dividends and had zero share buybacks. How much cash would it have had on its balance sheet(with imputed interest of course) by 2015 and let us assume it will make the $20 EPS and IBM has already announced additional share buybacks so more than likely the shares outstanding will be 1 billion.

    What then would EPS and revenue be in 2015 for IBM alone. Then take the cash that would be on the Balance sheet and see which companies IBM could buy with that cash pool e.g SAP, EMC etc (even at today's 'top' prices) Then combine those company's financials with IBMs and see what the combined entities EPS and revenue be.

    I have always been curious if Buffet is smarter than all of us on issue of the value of dividend and share buy backs on a company's stock price.
    Apr 10 09:18 AM | Likes Like |Link to Comment
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