“What’s so fascinating about IBM to us is that it’s a good example of what I teach my class at [the University of Wisconsin] ... about the idea of sometimes the greatest scams are hiding right in plain sight through the use of pro forma accounting,” he told CNBC.
The stock on Monday closed at $142.32, down 1.6%. It has gained 5% in the last month, as investors see glimmers of hope for the company. It’s scheduled to report earnings Wednesday after the market close.
“IBM is supposed to earn almost $11 this year. For the trailing 12 months, they’ve earned less than $9,” Chanos said.
“But … if you look at IBM’s operating earnings, and add their intellectual property royalty stream, and tax it at a normal 21%, the actual earnings are $6.
“You have this almost $5 spread between what IBM is really earning and what they claim they hope to earn on a quote adjusted basis this year,” Chanos said. “This is just more financial engineering that this company is doing.”
Morningstar analyst Julie Bhusal Sharma puts fair value for IBM at $125, assigning it a narrow moat.
In the second quarter, “the company dealt with continued headwinds to its managed infrastructure business because of the option to now have public cloud providers manage workloads, while benefiting from cloud tailwinds in its software and business services portfolio,” she wrote in July.