Activist investing has been one of the pillars of the six year bull market. And no target has been too big. Apple felt the pressure from Carl Icahn and returned more cash, Nelson Peltz pressured two hundred year old DuPont to split, Dan Loeb nudged Yahoo to shake up its “bungling” board, Icahn urged eBay to unlock shareholder value by spinning out its faster growing Paypal division. The list goes on and on; YUM, MCD, GE, BID, AXP, QCOM, etc.
Every so often the management (and board) of a beleaguered company will read these market tea-leaves and be proactive with a little financial engineering. Hewlett Packard (HPQ) hopes to do so with its November 1st split up of its legacy hardware business and its faster growing services business. Only time will tell if this benefits shareholders. In most splits the benefits are only marginal. Owning the faster growing piece isn’t a no brainer as management breaks can’t always be quantified.
Which leads me to IBM, a company that has seen sales decline from its 2011 peak of $107 billion to an expected $82 billion in 2015, down about 23%. That’s far greater than HPQ’s sales decline of 18% during the same time period ($127 billion down to an expected $104 in 2015).
Unsurprisingly, IBM reported Q3 results last night that disappointed. And for the 4th time this year offered downbeat guidance. Shares are down at $142 as I write, less than 1% from its 52 week and five year low:
The stock is down 35% from its all time highs made in 2011. And the company has bought back tens of billions of dollars worth of shares since the highs, resulting in massive value destruction in an effort to manage earnings with the backdrop of quickly deteriorating fundamentals during that same time period. So will IBM be the next target for activists?
Probably not while Warren Buffet remains the largest shareholder with 8% of the shares outstanding. Maybe it’s time for Mr. Buffett to go activist in the twilight of his career? That’s probably not going to happen, but I can’t think of a more titillating headline than Carl Icahn taking on Warren Buffet in battle for Big Blue’s soul (or something like that, I am not the headline guy at RR).
On the flip-side to activism, there has been m&a. But IBM ain’t exactly in a spot to do anything that would move the needle given the state of their business and their balance sheet.
As far as trading the stock. Given the state of enterprise demand, sentiment towards IBM and the challenges to their core business, there’s no rush to pick a bottom in the stock. But while the stock screens as cheap, until there is some sort of corporate action to give shareholders hope of a fundamental turn without an uptick in demand, the shares will continue to be a sale on rallies.
To say that $140 is a key long term level on the chart for IBM would be an understatement. It marks the high from 1999, and what turned out to be a massive breakout in 2010:
I suspect a decent long entry is closer to $120 and at that level may discount what is becoming increasingly obvious headwinds at this stage of the economic recovery.