IBM: Dow and Out?

What is the life span of a stock in “dog-of-the-Dow” years?

It’s been a rather bad month for IBM.

Since announcing 1Q 2017 earnings in early April, the stock is down over 20 points to $150 a share – a drop of 12 percent. And for good reason. Included in the rosy remarks by CFO Martin Schroeter (“In the first quarter, we continued to deliver strong performance in our strategic imperatives, with revenue up 13percent at constant currency. Our cloud offerings were up 35 percent this quarter, led by Cloud-as-a-service, which was up over 60 percent”) was the revelation that IBM’s “revenue for the quarter was $18.2 billion, which is down two percent.” And with that, IBM managed to log its 20th straight quarter without growing revenue.

20 quarters ago is just around the time Ginni Rometty took the helm from Sam Palmisano which means IBM’s revenue nosedive corresponds almost exactly to her run so far as CEO. Many people have called for Ginni’s head – but instead of getting the axe from the BOD, she instead received a pay hike of 60 percent to $33 million. Fully 46 percent of shares votes against the ill-conceived raise – a measure of protest practically unheard of in corporate America. (It’s hard to calculate with precision, but a good guess is that Rometty’s salary increase exceeded the combined raises of 20,000 other IBMers.)

Other less-than-comforting IBM news in the recent past includes:

  • “Oracle of Omaha” Warren Buffett’s better-late-than-never sale of a major stake. Perhaps now considered the “Nitwit of Nebraska,” Buffett took an estimated $812 million loss since buying up a huge stake a few years ago.
  • Credit rating cuts by S&P and Moody’s, and stock downgrades from Societe Generale, Zacks Investment Research, and RBC.
  • In a solid expression of support, the IBM Pension Fund managers actually dump IBM stock from their portfolio.
  • A lawsuit by the state of Pennsylvania claiming IBM failed to live up to a multi-million dollar contract to update the state’s unemployment claims system.
  • The shedding of $20 billion in market cap in a mere 30 days.

Despite all this negativity, no one really expects IBM will go casters-up any time soon. It will undoubtedly trudge along selling off assets, laying off employees, engineering tax dodges, and yes, delivering some remarkable technologies that have kept the company in the game for more than 100 years.

The question we have at Major Terata is whether IBM will remain a component of the Dow Jones Industrial average.

The Dow Jones Industrial average is a distillation of the performances of a supposedly representative set of 30 global companies mixed up with pixie dust into a concoction which yields a number that investors every business day duly prostrate before.

Here is a list of the current members of the Dow:


IBM and HP are the only companies in the Dow’s subsector of “Computers/Technology.” But given that computers and technology make up less than 10 percent of IBM’s revenue (assuming “technology” means “hardware”) does its representation of the category even make sense? Unless the Dow boys create a new subsector that comports with what IBM wants to be (a stew of cognitive computing, cloud delivery models, blockchain, weather data, etc.), IBM’s inclusion in the Dow would not seem to be particularly compelling. Wouldn’t it make more sense to replace IBM with Facebook, Google or Amazon – companies that are larger and more relevant to today’s economy?

The DJIA is certainly a top go-to metric for the state of the larger stock market, but it’s also a tool to cheer on investors to load up on more equities. And for that reason there is undoubtedly a desire on the part of the Dow’s stewards to ensure laggards don’t stay around long to drag down the average. After all, in 1982 the DJIA included such has-beens as Woolworths, United Carbide, International Paper, US Steel, International Harvester, and the American Can Company.

IBM makes up about 5 percent of the Dow average, and had it been exorcised from the list and replaced with a hotter property, who knows how high the DJIA would be right now. If IBM continues to tread water and continues to hold back the DJIA, don’t be surprised if it doesn’t make it to a 40th anniversary as a Dow component.

But It Could Be Worse

IBM has taken its share of lumps, but compared to these horrible companies Big Blue is a national treasure.

  • Wells Fargo – Scammed its own customers by opening bogus bank accounts in their names, and fucking up their credit ratings. They’re so bad, the top miscreant executives were forced to pay back ill-gotten bonuses – something virtually unheard-of in modern American business.
  • Volkswagen – Unable to meet emissions promises in their “clean” Diesel engines, VW relied on embedded software to cheat the EPA test machines. And when confronted with the evidence, they lied until they could no longer sit inside a Passat without banging their noses on the windshield.
  • Valeant – Acquired rights to old-time specialty medicines and jacked up retail prices a hundred-fold, thus extorting desperately ill people in the pursuit of naked greed. Thankfully, Valeant’s decline yielded one good thing: Bill Ackman had to take a pipe up the ass on his investment in the morally bereft company.
  • Spirit Airlines – Take it from Kate Hanni, former executive director of “They are the absolute worst airline in the country. If it costs a little more, take the other airline.”
  • Snap – Purveyor of a mostly inane smart-phone app with features easily copied by Facebook; goes public then announces $2.1 billion loss. Shareholders running for the hills after the stock falls well below the IPO price.
  • Uber – The list of shenanigans pulled by the ride-hailing company is mindboggling, the most recent being the deployment of tricky apps designed to work around local regulations barring them from operating. The level of deceit on Uber’s part should seal the verdict that they are a loathsome enterprise bent on winning at any cost.
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