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Thursday, July 11, 2013

Calling BS on GS - $IBM

Been meaning to write this post since Tuesday, but on Tuesday had one of those life changing events (in a awesome way), and the complete lack of sleep (the kind that makes even an insomniac go nuts), causing the post to go on the back burner

GS' downgrade on IBM is predicated on multiple compression. That's it. 

GS reduced the target price to $200. Original target price was $220. IBM's eps estimate was reduced from 16.71 to 16.61.

A 9% reduction in target price was justified from a 0.5% reduction in trailing PE. Yeah, that's a big WTF!?!

The "wtf" gets worse when we see the price reduction even assumes IBM's financial plan will meet expectations. 

The analyst tried to justify the downgrade due to lower margins. The only way the stock sees a $200 stock price is if the multiple contracts towards 12. 

Obviously anything can happen, but given the consistency of earnings for IBM w/ in the GS downgrade, I am puzzled by the call. (Especially since Oracle and Accenture trade at a higher trailing multiples, and completely botched their numbers.)

Technically, the curious thing about IBM is its weekly 100sma. IBM is currently sitting on it.

In the past couple of years, if the SMA was breached, there would be a sharp move downward. 

In 2009, the move down was obviously exaggerated.

The way the charts are telling the story: if IBM produced a poor quarter, then the sma may very well get breached, and that will cause about a 5-9% decline. But if they produce a decent to good quarter, the current level should be a base.

Seems like Goldman's call is more technical, but attempted to be wrapped in some fundamental justification. 

Will IBM miss, meet or beat? Not sure, but they usually meet. The last two quarters we saw them beat nicely, but we also saw them miss. (However I respected their miss because they owned it, unlike the other guys.)

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