Thursday, February 27, 2014

IBM: “No, Really, We Love Our Customers! Honest! Wait! Come Back!”


 Well the IBM 2013 10K is out, and it kicks off with what can only be described as a 180-degree turn in the way the company presents itself to the public.
 As we pointed out here and here, IBM has spent the last five years presenting itself to the public as a shareholder-friendly—indeed, shareholder-obsessed—dividend-and-buyback machine that prided itself on jacking up margins (both gross and net) by swapping in and out of business lines,  “rebalancing” its workforce (i.e. layoffs), and avoiding the taxman however (and wherever—e.g. The Netherlands) the laws allowed it to.
 But that was last year.
 This year, it seems, IBM is a new company.   
 Gone from the “Strategy” declaration in the opening pages of the 2013 10K is  the previous year’s braggadocio about “sustained earnings per share growth and strong cash generation” on the backs of customers whose main role seemed to be to hand cash to IBM in return for the pleasure of watching IBM’s stock price rise on the strength of ever-increasing EPS, thanks mainly to share repurchases from all that cash.
 In its place is a new “purpose,” which, we are told with a straight face, is “making our company essential to clients, employees, partners, investors and communities.”
 (Note to Wall Street: you no longer rank first on IBM’s list of pals—you now rank fourth.)
 Lest readers think we are making up this 180 turn in the infamous IBM “Roadmap,” we provide below the deletion (in red type) from the “Strategy” discussion in Part 1, Item 1, of IBM’s 2012 10K, followed by its replacement (in green type) in IBM’s newly released 2013 10K.  (Both thanks to the indispensable StreetEvents “Daily Delta” service.)

 Old IBM:

 New IBM:






 Meet the new IBM—way different than the old IBM!



Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, February 26, 2014

Clean Harbors, Compliant Analysts, and “Revenue Ex-Cat-in-the-Hat”


 When readers ask, “Is there a company out there that’s got lower quality earnings than IBM?” the unfortunate answer is, “How much time have you got?”
 That’s because a majority of U.S. companies report some form of “adjusted earnings,” not to mention some form of “adjusted revenues,” and whatever they’re “adjusting” for, Wall Street’s Finest accept them at face value.
 Even Coca-Cola—Warren Buffett’s “perpetual” investment—has taken to reporting a revenue metric we’d never heard of before this earnings season: they call it “currency neutral, ex-structural revenue growth.”
 (If, just for fun, a company started reported “Revenue Ex-Cat in the Hat,” we wouldn’t be surprised if more than a few of Wall Street’s Finest dutifully reported “Revenue-Ex-Cat in the Hat” in their so-called research reports.)
 In any event, if conservative old white-shoe folks from Atlanta can make up stuff with the best of ‘em—and the best of ‘em, of course, would be IBM—you can bet there are a whole lot of companies that dream up all kinds of adjustments the number-crunchers on Wall Street crank into their spreadsheets without a second thought.
 Exhibit A today in this regard is Clean Harbors, a broken (for the moment) “story” stock whose story has been that smart management + pricey acquisitions – “earnings adjustments” = fancy multiple, despite the fact that the acquisitions have proved less than stellar, and the perpetual subtraction of “adjustments” from GAAP earnings has masked a deteriorating business model that only recently (i.e. this morning) came unmasked.
 The fact that CLH’s numbers stank is nothing new: the company hasn’t “made the number” almost since the day its $1.25 billion purchase of Safety-Kleen closed the last month of 2012.  But do not take our word for it: quarterly earnings “surprises” as compiled by Bloomberg (starting with the first Safety-Kleen quarter through today’s report) read as follows: -18%, +14%, -22%, -6%, -20%.
 Of course, “earnings” for CLH, like so many public companies today, is a construct of remarkable fluidity, excluding, just for example, environmental liability accruals that recur like clockwork, and represent the fact that the environment remediation business of the company shells out a lot of cash to clean up after itself.
 Whatever the construct, CLH’s new, “adjusted” EBITDA target for 2014 is about $100 million lower than Wall Street’s Finest were expecting just one year ago.
 And that’s real money, not something the Cat in the Hat dreamed up to keep the kids occupied.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, February 05, 2014

IBM 39, Emerson Electric 2


Quick!  What’s wrong with this paragraph?
 Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's investor conference call…. This conference is being recorded today, February 4, 2014. Emerson's commentary and responses to your questions may contain forward-looking statements including the Company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson. Go ahead. 
 If you said, “Golly, it doesn’t include the usual warnings about how the call ‘contains non-GAAP financial measures’,” then you win.
 Emerson, you see, doesn’t lead with non-GAAP financials the way some companies do—and by “some companies” we’re thinking especially about IBM, which uses non-GAAP financials the way a magician uses his sleeves.
 “We present GAAP numbers,” says Emerson’s famously frank CEO, David Farr.  “Which means we include all pension costs, all intangible amortization, and our performance share stock programs in the consolidated numbers.   We present GAAP numbers.”
 And Farr is true to his word: All the numbers Emerson’s team discusses on its calls are strictly GAAP—that is, they conform to generally accepted accounting principles. 
 In fact, in Emerson’s press release yesterday, the term “non-GAAP” appeared just twice, at the very end of the release with a table detailing a modest GAAP to non-GAAP reconciliation that would have boosted year over year earnings growth from 5% to 8% had the company chosen to use it.
 Emerson did not, however, choose to use it.
 IBM, on the other hand, has no such qualms.  
 The term “non-GAAP” appeared 39 times in IBM’s most recent quarterly earnings release, starting in the very first sentence.
 Such is IBM’s prowess at presenting the most favorable numbers possible that, as we have seen in our previous look at the number-massaging machine known as Big Blue, an 11% pre-tax income drop in the fourth quarter turned into an 11% after-tax gain, thanks to the magic of a near-non-existent 11.2% tax rate in this year’s quarter.
 Now, you may wonder how Warren Buffett, who routinely complains about the big-shots in America who pay a lower tax rate than his secretary, feels about that.
 We don’t.  After all, Buffett also complains about the big-shots who don’t pay big inheritance taxes on their wealth, yet Buffett will avoid the biggest inheritance tax bill in American history by giving away his shares in Berkshire Hathaway ahead of time, and rationalizes it thusly: he’s just following the rules.
 Surely IBM is just following the rules.
 But what rules, exactly, is IBM following?
 Fortunately, Bloomberg has the answer, here, in a story that broke yesterday around the time Emerson’s clean, all-GAAP earnings were hitting the tape.  
 Seems IBM routes “almost all sales in Europe, the Middle East, Africa, Asia and some of the Americas” through a Netherlands subsidiary, IBM International Group BV, which counted 205,000 employees at the end of 2012, “only 2% of whom actually work in the Netherlands.”
 The Dutch Connection, according to Bloomberg, helped IBM shave $1.8 billion of its expected tax provision in 2013—adding more than 10% to the $16.5 billion in net income IBM reported.
 And that, it appears, is how what might have been a 10% decline in net income for the full year became a modest, easily massaged 1% drop.
 Which is why, as we’ve seen, unlike Emerson Electric—which plays it straight down the middle—IBM prefers to focus Wall Street on its non-GAAP, AGWICTMTQGP (“Anything-Goes-When-It-Comes-To-Making-The-Quarter-Accounting-Principles”) number, where the weeds are deeper and the ball can be moved around without too many people noticing.
 The problem with non-GAAP, AGWICTMTQGP-based earnings reports, as we pointed out many times when Hewlett-Packard was popular with the beat-the-quarter crowd, is that it allows companies to include the good stuff from, say, acquisitions (revenues and gross profits) while excluding the bad stuff (intangibles and employee severance costs).
 And as HP found out this week when it years-too-late revised Autonomy’s 2010 revenues down by precisely 54%, the good stuff isn’t necessarily as good as it appears to be at the time.
 As for how all this bears on IBM’s set-in-stone $20 EPS “Roadmap” for 2015, we have no opinion except that IBM will make it.
 There may be 39 uses of the phrase “non-GAAP” in the press release announcing that $20 number, but they’ll make it.
 How can we be so confident?   Well, the recently-announced sale of the IBM server business to Lenovo for starters. 
 Lenovo is paying IBM a couple billion for a business that has a negative book value.   So IBM will have, we are told by Wall Street’s Finest, a gain of $1 billion for the non-GAAP, AGWICTMTQGP cookie jar.
 Even with the SEC investigating how IBM reports its “cloud” revenue (disclosed last year)—IBM juices up its “cloud” revenue by including hardware and IT services in the number—we would bet they make it.
 In fact, we put the odds at, oh, 39 to 2.
  

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.