May 5, 2015

Doug Kass shorts IBM

Despite a 12% revenue decline and a 2.5% fall in net income, IBM's earnings per share beat forecasts!


1. Over the last 12 months, the company's fully diluted shares outstanding fell by 50 million shares, to 990 million shares. IBM purchased $1.2 billion of its own stock in the first quarter of 2015.

2. IBM did not purchase any shares in the fourth quarter of 2014 because its debt load became so large that it placed the company close to being downgraded.

3. Net debt dropped by over $2 billion in first quarter of 2015 to $30 billion. This was achieved by a sharp $3.5 billion collection (and drop) in receivables being financed, which reduced the company's total assets and allowed it to buy back stock.

4. EPS were further buoyed by the company's net effective tax rate, which dropped by a full 1% to 19.5%

I find it hard to believe that IBM's stock gain will be maintained.

I have reestablished my short at $169.20.