Stanley Druckenmiller Nailed The Biggest Problem Facing IBM

Stanley druckenmillerYouTubeStanley Druckenmiller.

Back in July, we highlighted comments from hedge fund manager Stanley Druckenmiller who said IBM was the “poster child” for what is wrong with modern corporate behaviour.

Druckenmiller said that IBM’s financial engineering practices, which include tripling its debt to repurchase stock, are exactly what’s been wrong with the current economic recovery.

But there was something else Druckenmiller nailed that is an even bigger problem for Big Blue: revenue is falling.

In his comments back in July, Druckenmiller said that despite a stock price that had, to that point, risen more than 50% since the 2008 stock market bottom, IBM’s sales were identical to what they were six years ago.

And on Monday morning, it got worse as IBM reported earnings that declined 4% year over year to $US22.4 billion.

In morning trade on Monday, shares of IBM were down about 7%.

According to data from Yahoo Finance, Wall Street expects IBM’s annual revenue in its fiscal-year 2014, which ends in December, to decline 2.3% to $US97.4 billion. Those expectations are not yet adjusted for Monday’s results, which disappointed by about $US1 billion, and the Street’s annual those expectations are likely to be pared further.

And comments from IBM CEO Ginni Rometty certainly didn’t do much to engender a great deal of confidence. “We saw a marked slowdown in September in client buying behaviour,” Rometty said, “and our results also point to the unprecedented pace of change in our industry.”

Overall, Druckenmiller’s comments were in the spirit of highlighting the problems he believes have been created by Fed policy, in particular thwarting capital spending and encouraging companies to engage in financial engineering rather than invest in their business.

At the end of September, IBM had $US1.4 billion remaining on its current share repurchase authorization.

The company said it expects to request an additional repurchase program at its October board meeting.

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