Annex Bulletin 2013-04                            July 12, 2013

A partially OPEN edition



Apple Falls from Treetop (Analysis of latest market and business results of top 15 IT companies)



Updated 7/12/13, 8:40PM HST

Analysis of Market & Business Performances of Top Global IT Companies

Wall Street Loves a Loser

It's all about fashion: HP stock tops all despite huge losses; Apple at bottom despite biggest profits;

Google leapfrogs over IBM, Microsoft to #2 spot in market cap;

Top IT Market Cap rises 5.9% in 1H13, mostly based on wishful thinking (higher P/E ratios); Profits down 1.6%; Revenue up only 2%

HAIKU, Maui, July 12, 2013 - "Where ignorance is bliss, 'tis folly to be wise," Cambridge University professor and poet Thomas Gray wrote some 250 years ago.  He must have been extremely prescient. Because his famous quote describes perfectly the current state of affairs on Wall Street.

"Check reason at the door," perhaps the sign above the New York Stock Exchange should read.  "You are entering a House of Greed."

And Greed, of course, has no room for wisdom. So back to Thomas Gray (1716-1771).

What brought this on?

Well, guess which company among the top 15 global IT leaders has done the best on the stock market in the first six months of this year?

Answer: It's the one that lost the most money ($13.4 billion to be precise - HP).

"Hm... where's the sense in that?" - you may be wondering?

Wait. It gets better.

Guess which company's stock is at the bottom of the top 15 global IT leaders?

Answer: It's the one that made the most money ($40 billion to be precise - Apple).

See how wise and prescient Thomas Gray was? On Wall Street, folly rules, not reason. The stock market which sets new all time highs day after day while the profits of the companies it trades decline can be only described as a fashion show or a casino in which the House sets all the rules and is free to change them any time.

HP is now in vogue. That's the only "reason" HP stock is up 62% this year, while its revenues shrank 4% and the red ink gushed to the bottom line like lava out of the Kilauea volcano.

Apple, on the other hand, is not in vogue. Not anymore. Apple was fashionable the year before and the year before that and the year before that. But unlike HP, Apple did accumulate massive profits and revenues during those years.  And that is why it is still Numero Uno in the IT business notwithstanding its stock market woes.

Meanwhile, it is a little more difficult to fathom the "reasons" Dow Jones is setting new records this year. The index is sizzling, up 15% to an all-time high of nearly 15,500.  Which is odd, considering that the chips this casino is using - corporate balance sheets and profit and loss statements - are not so hot. In fact, the only thing that's lifting them up is the hot air Wall Street is generating with its overinflated enthusiasm for equities.  Check out this chart...

The market cap of the top 15 global leaders is up 6% even though their aggregate profits are DOWN 2% while the revenues are rising only 2%.  In fact, take Google and Facebook out of the picture, and the rest of the IT leaders' revenues are DOWN 5% (see Top 15 Table).

So what does that tells us? Well, one thing it shows is that the stock market has nothing to do with corporate performance. That's an old illusion that needs to be broken.  Corporate fundamentals are merely a facade that gives this New York casino the respectability it does not deserve vis-a-vis the Las Vegas or the Atlantic City ones, for example. At least the latter two casinos make no bones about what drives them - customers' money and greed, not revenues and profits of the chip makers, as Wall Street pretends.

The increase in Price/Earnings (P/E) ratios despite declining profits also underscores this observation.  Clearly, it is the hopes of FUTURE earnings that are fueling the record stock market prices rather than the facts on the ground.  Which is a good time for any prudent investor to take shelter rather than join in with the madding crowd.  Because after each peak, comes a valley. And you don't want to be a proud owner of a lot of IT stocks like HP when that happens.

Apple Also Dominates Business Fundamentals

Apple also dominates business fundamentals. When it comes to shareholders' equity, the company towers over Microsoft and Google, the next two largest competitors in this category.

IBM, on the other hand, the industry's oldest company at 102, is only 10th. In part, that's because of Big Blue's incessant stock buybacks. The company is literally selling itself out to Wall Street. And has been doing it for 18 years now. So clearly, the buybacks are a major reason IBM ranks only 10th in terms of equity.

Disappointing earnings is another one. Here's what we said on Apr 18 about the latest one (1Q13) in an email message:

One cannot count on "financial engineering" alone to boost profit margins.  One needs NEW revenues. Period. No currency, tax rate, share buybacks, quarter-to-quarter overflows or other adjustments or explanations. True new business is the missing factor in IBM results.

For example, last year's STG (IBM hardware) results were disappointing. They were down 7%.  They led to the 
Big Blue Feet of Clay piece (also see Lack of Growth: IBM's Achilles Heel, July 2012). Alas, the latest STG results were down 17% (-14% without RSS).

In other words, they are twice as bad as even the disappointing numbers a year ago.  And despite the fact that the mainframe business is actually UP!

Clearly, whatever IBM's growth "fix" is, "it ain't working."  As president Eisenhower once said, "I think we have flogged this horse enough. Let's get a new one."  Big Blue needs a new growth strategy.  And maybe fresh new blood to carry it out.

The steep drop in the stock price speaks loudly enough (down 4% in after-hours trading as we speak).  And that's on top of a 1.2% drop in regular trading. Wall Street investors are evidently starting to realize that they've gotten ahead of themselves and are taking corrective action.  As usual, after the horse has already left the barn.

The Big Blue share eventually bottomed out at about $187, way off their giddying heights and all-time highs at about $216 in mid-March. Since that time, IBM share moved up for a while, but then tumbled down in the low $190's again as the next earnings announcement approaches (July 17). Guess investors don't want to be caught again with their pants down if it is another disappointment. 

If Size Matters, Apple Increases Its Edge in Revenues, Too

To the extent that size still matters in the IT industry, Apple has once again increased its lead over HP and IBM when it comes to revenues. It was not hard. Because both HP and IBM revenues shrank. So even a modest increase by Apple's standards - up 8% - was more than enough to increase the distance between the leader and the next two competitors.

Google and Facebook were the only Top 15 IT leaders that reported double digit revenue growth since our last report six months ago. Microsoft revenues also rose 5% as did SAP's.

Which brings us finally to the bottom line - the net earnings. Apple is still the "king of the hill" in profitability with net earnings 21% bigger than the COMBINED net of both IBM and Microsoft. Obviously, this also means that Apple is making more than twice as much money than either IBM or Microsoft, the two next most profitable competitors.

Google is now fourth, having surpassed Oracle. Intel is a close fifth.

At the bottom, of course, we have HP with its huge loss which caused us to truncate this chart. Fujitsu, the erstwhile No. 2 company in the IT industry, is also bleeding red ink.  And the much ballyhooed Facebook, which went public last year, is still just barely scratching the surface in terms of profitability.

So "the mountain shook, a mouse of born," seems to be an apt summary of Facebook's stock market status.

Happy bargain hunting

Bob Djurdjevic

Volume XXIX, Annex Bulletin 2013-04
July 12, 2013

Bob Djurdjevic, Editor

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HP: Duped, Down and Out? (Analysis of HP's business and stock results)

Same Old Story, New Numbers Underscore Lack of IBM Growth (Analysis of IBM's third quarter business results)

Lack of Growth: IBM's Achilles Heel (Analysis of IBM's 2Q12 business results)

Apple Continues to Dominate (Analysis of top global IT companies' market and business results)

Big Blue Feet of Clay (Analysis of IBM first quarter results and long-term forecast)

Wall Street in Love! (No Signs of Caution on Ides of March, IBM Forecast Overshadowed by Wall Street Action)

Waning of PC Era Hurts HP (Analysis of latest HP business results)

Apple Leaves Everybody in Dust (Analysis of latest market and business results of top 15 IT companies)

Apple, IBM Clean Up, Google Stumbles (Analysis of fourth quarter business results of five major IT companies - Apple, IBM, Microsoft, Intel and Google)