MorningWord 10/20/14: $IBM – Big Blew

In our continuing coverage of what it’s like to enter a bear market™ we want to use the example of this morning’s IBM’s earnings miss.

But let’s first start with the news that preceded the miss, that IBM would pay a company owned by the apparent buyer of last resort, the investment arm of Abu Dhabi $1.5 billion over 3 years to take their money losing chip business off their hands and that $IBM would take a pre-tax charge of $4.7 billion, per Bloomberg:

So a little fall house cleaning, basically paying Goodwill to come and take everything in their garage, attic and basement so they they can take a write-off. Hard choices made but dissapointing in light of all of the stock the company has been buying back:

The weighted-average number of diluted common shares outstanding in the third-quarter 2014 was 998 million compared with 1.10 billion shares in the same period of 2013. As of September 30, 2014, there were 990 million basic common shares outstanding.

In the past year, IBM has retired almost 11% of their shares outstanding while earnings have grown from $16.29 to $16.67 during that period, or only about 2%, as sales have declined 2%.

But for those investors who are unhappy with morning with the stock down 6.5% in the pre-market, fear not because this headline just hit the wires:

*IBM SEES SEEKING ADDED SHARE BUYBACK AT OCT. BOARD MEETING

This company is a total joke. They move into businesses that are hot after competitors have already made inroads (like x86 server chips, ThinkPads, and Cloud Services) and end up giving them away to foreign entities while taking big charges. This all while using most of their free cash flow to buyback their stock in order to manage earnings. Talk about value destruction. What’s interesting to me is that this quarter’s miss is being blamed on, wait for it:

*IBM SAYS SOFTWARE REVENUE WEAKER THAN EXPECTED

*IBM: STILL SEEING PRICE AND PROFIT PRESSURE IN SERVICES

*IBM: SAW LOWER PRODUCTIVITY IN SERVICES BUSINESS IN 3Q

*IBM: NOT RELYING ON `DRAMATIC TURNAROUND’ IN SERVICES SIGNINGS

*IBM: `DID NOT GET THE SIGNINGS THAT WE WANTED’ IN SERVICES

And as Business Insider’s Sam Ro put it, in a article title, The Scariest Sentence From IBM’s Awful Earnings Announcement:

“We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry,” IBM CEO Ginni Rometty said.

So IBM moves into the latest hot growth businesses and then gets surprised by pricing pressures that they have helped cause!

We have been on to Big Blue for a while and fairly consistently made money with short biased trades on rallies over the last year:

Oct 13, 2014: Trade Update – $IBM: Closing Oct Put Spread For a Double

April 17th, 2014: Trade Update $IBM – Closing April Put Butterfly for a Triple

Jan 24th, 2014: Trade Update $IBM – Taking Off Put Butterfly for Quick Profit

Nov 25th, 2013: Trade Update $IBM – Taking Off Put Butterfly for Quick Profit

We took off our most recent trade a week ago as the stock appeared to be holding at near term technical support, with an eye towards re-evaluating the bearish thesis in front of tonight’s earnings report (which came early).

With the stock below $170 pre-market, I suspect that this is now a tough press on the short side. But looking at the 5 year chart, current trading levels places it below what looked to be a triple bottom completed early this year, with no real support until $160ish, which is where I expect it to go in the coming months:

With Buffet a large shareholder, and the recent trend towards the breakup of large tech companies the stock could attract activists, but at this point a bunch of crap lumped together may be the best moat Buffet could hope for with this investment. We will continue to short on rallies.