The week opened with the earnings of a number of high-profile corporate names that disappointed investors. Most notable of these was International Business Machines, which really ought to be called International Buyback Machines, given Big Blue’s penchant for driving earnings through financial engineering rather than, y’know, the real kind of engineering.
IBM fell short on revenue estimates, saw shrinking demand in part because of reduced government spending (China’s government, not the US), yet exceeded net income estimates because of – what else – a lower tax rate, now at 11 percent vs 14 pct a year ago.
Margins continue to shrink – the pre-tax margin for the fourth quarter dipped to 25.1 percent from 26.7 percent a year ago. So, in some ways, it’s a microcosm of the recent earnings trend – cost-cutting, relying on government largesse, moving money around, and making per-share earnings look better by just changing the whole “per share” thing.
IBM’s not the only company that mirrors the S&P 500 writ small. Another is Netflix, the streaming media company that was the S&P 500′s best performer in 2013 and reports earnings after Wednesday’s close.
The bear case is pretty much handled by pointing at a chart of the stock rocketing into the stratosphere, looking into the TV cameras, and saying “Seriously?” Which is pretty much how some of the bearish types on Wall Street think of the entire market right now, believing they’re the only sane ones on earth while everyone else is crazy.
But we know how that goes when it goes wrong, and with Netflix, all those bets against it went wrong all year – causing short interest on the name to dip from the mid-20 percent area to a miniscule 0.93 percent of the float, according to Markit, which puts it in ExxonMobil territory.
Analysts expect a gain of about 2 million U.S. subscribers, and Wall Street forecasts net income of $41 million, five times the $8 million it recorded a year earlier.
The expectations at least remain positive, so that’s something. But there’s an irony here – the stock more than tripled in 2013, and from an intrinsic value basis, ranks as one of the worst in Starmine’s greater universe: The $330 price in the market should be closer to $61 a share, according to Starmine, as its forward price-earnings ratio currently stands at about 83, when it warrants somewhere around a 19 P/E.
The idea that the overall market is just as overvalued as Netflix doesn’t quite pass the smell test. You can hear the bear’s lament in the discussion of the broad market just as can be heard in the NFLX discussion – one that waned as the stock kept rising.