IBM reported its Q1 results last night and fooled the Wall Street crowd into believing that business is great. I
think, however, that many of Enron’s accountants must now be working at IBM.
How come? IBM’s profits are more a result of financial engineering than strong business fundamentals.
Myth #1: IBM said it’s sales increased by 11% last quarter. Ha! Once you back out currency gains from the falling dollar, IBM sales only increased by
4%. I’m not impressed with a company that is growing by only 4%.
Myth #2: North America sales increased by 8% but sales from the BRIC countries (Brazil, Russia, India, and China) increased by 26%. This shows that Asia is still the sweetest part of
the stock market curve to be invested in and how vulnerable IBM is.
Myth #3: IBM restructured its pension plan and will be booking a $950 million gain from that change. This is the type
of financial engineering that makes profits look good when they actually stink.
Myth #4: IBM increased its stock buyback to $12 billion. The reduction is outstanding shares increased profits by 13
cents per share. Stock buybacks are a great thing but it needs to be combined with strong top line sales growth before
I am impressed. Plus, IBM has been taking on debt to finance these buybacks, which is a very red flag.
Since a huge chunk of IBM’s paper profits come from financial engineering, it has now become more of a financial firm
than a technology company. And it is a train wreck waiting to happen.
