Greenberg: Wall Street Tires of IBM's Managed Earnings
As revenue growth slowed at IBM in late 2011 and early 2012, investors were willing to cut Big Blue some slack.
This was, after all, IBM, which had hooked investors on the simple concept of a "roadmap" with a five-year earnings-per-share target. The 2010 roadmap was nothing short of a spectacular success, as the company exceeded its target of at least $11.10 per share. It was no surprise, then, that IBM upped the ante, with a new five-year "roadmap" that included a goal of at least $20 in "operating" earnings per share by 2015.
From that point on, until a few quarters ago, nothing else mattered but the $20 target.
Then, as I wrote a quarter ago, as the stock started to sink, investors woke up and realized that risk (and reality) was finally catching up with IBM.
I've always been dubious of long-term EPS targets like IBM's.
It's not that the company can't get there, it's that once it gives a big number years out, it's under pressure to make that number -- no matter what.
In the past, I've questioned IBM execs about the wisdom of such a long-term target, and they proudly showed off their colorful charts and graphs on how they expected to get there. This much would come from share buybacks. This much from a catch-all known as "operating leverage," a.k.a layoffs. And this much from future acquisitions.
It looked good on paper but ... it's one thing for a company to have an internal long-term plan; it's another to lay it out for investors, down to the penny.
In all of my years of doing this, I never quite understood why or how any company could claim to see that far out given geo-economic, geo-political, geo-technological and every other geo-by-golly type of uncertainty that the roadmap hadn't factored in -- including, as was the case with IBM, the departures of the CEO and CFO who hatched the roadmap concept in the first place.
On Tuesday's earnings call, after the seventh-straight quarter of negative earnings growth, analysts sounded as though they had had enough. They hammered the company on the quality of earnings -- including a tax rate that was less than half the company's normal tax rate. The tone, in general, was dubious on how IBM could hit the $20 target through real growth. It was a terrible call.
The company, clearly on the defensive, urged investors to look to the long term. Toward the end of the call, CFO Martin Schroeter said:
"The roadmap we have laid out...is a way for us to allocate capital, and a way for us to describe to investors how we shift the portfolio. That shift of the portfolio includes acquisitions, includes divestitures, it includes rebalancing the workforce, and all of that translates to an EPS at the end. That EPS is reflective of all those activities. It's got the workforce rebalancing. It's got the gains, if there are any. It's got the shift of investment.
"So the road map is on an all-in basis, if you will, and our guidance is also on an all-in basis. So I think the right way to look at our business, is to keep it on the basis in which we've described our longer-term performance."
Reality: Maybe that's the way Schroeter views the company, as he should; but it's not necessarily the way investors should. The numbers are the numbers and with IBM, it doesn't take a chartered financial analyst to tell you the trend is not their friend. IBM is clearly boxed in. It can't back off its $20 target, but it also can't see yet another quarterly revenue slide. At this point, quality top-line growth trumps a trumped-up bottom line. Maybe IBM should just swallow the bitter pill, reset the earnings per share clock, and move on. Better to take the hit and ultimately move higher from a lower real base than continuing to stretch it from a made-up higher base.
-- Written by Herb Greenberg in San Diego