Stocks go up, we’re incessantly told, because companies are doing well. Revenues are rising due to ingenious management strategies, irresistible products, or brilliant marketing. Earnings are rising due to, well, if not rising revenues, then cost cutting, moving production to cheaper countries, squeezing suppliers, cutting pay and benefits of the lucky ones who get to work there, and so on. We love that, and given that sales and earnings of these wondrous outfits are ballooning, their shares should be ballooning as well. And they are!
But what if revenues are declining and earnings are plunging, and not just for a bad-hair quarter, but for years, and companies issue earnings guidance that disappoint the wishful thinkers with clockwork regularity, and then even have the temerity to disappoint them again with actual results?
Their shares dip temporarily and might stay down for a week or two. But then the hype machine kicks in, and other metrics are dragged out, such as “free cash flow,” or how much “money” the company “returns to shareholders,” and everyone cherry-picks the data and suddenly remembers that none of this really matters anyway, certainly not such irrelevant facts as years of declining sales and plunging profits.
Because the only thing that really matters is how much money the Fed will print, and for how long; and secondarily, how much money the other central banks will print, because the rising tide of freshly printed money lifts all boats – even that of a company with declining sales and plunging profits. Its shares too gets pushed to new highs, and this happens quarter after quarter. Texas Instruments, for instance.
The list of what ails TI is long: crummy demand for some of its products, inconvenient changes in the semiconductor market, tough competition in the mobile-chip market…. So TI’s revenues have been declining for three years, from $13.97 billion in 2010 to $13.73 billion in 2011 and to $12.82 billion in 2012. This year is turning into another doozie.
Late Monday, as it announced its shriveling earnings for the third quarter, it disappointed wishful thinkers with revenues of $3.24 billion, down 4.3% from a year ago. It also forecast revenues for the fourth quarter of $2.86 billion to $3.1 billion, again disappointing wishful thinkers. Revenues for the whole year, at the midpoint of its estimate, would be 12.12 billion, down 5.5% from 2012, and down 11.7% from 2010.
And the earnings cliff-dive has been stunning. In 2010, TI earned $3.23 billion. In 2011, earnings plunged 31% and in 2012 another 21.3%, to $1.76 billion. This year isn’t shaping up to be pretty either. In Q3, earnings sagged 20%, to $629 million from a year ago.
What is striking is just how consistent this performance has been. TI could have had an up-year in between, either in revenues or in profits, just to liven up the scene, add some humor, and give us hope for a plot twist. But NO!
What is even more striking is the stock price. It started 2010 at $26, and after some major ups and downs along the way, it’s changing hands as I’m writing this at $40.22, down 1.9% for the day, but up over 30% for the year, despite sagging sales and earnings. And just a hair lower than its post-dotcom bubble high. TXN has soared 54% over a period when revenues have dropped 11.7% and earnings were cut nearly in half.
During the earnings call, Ron Slaymaker, VP of Investor Relations, tried to put some lipstick on the thing. Yes, revenue declined, he admitted, but then he went about cherry-picking his revenue data to throw analysts something to rave about. So excluding “legacy wireless revenues,” the remaining revenues actually increased, he said. It was all due to “the strength of our business model.” And since earnings, however much they may have plunged, beat TI’s own lowered projections “with some help from discrete tax items,” everything was hunky-dory.
“The quality of our revenue is much higher today,” explained CFO Kevin March – thanks “to the structural changes that we’ve made at TI over the past few years.” So revenues dropped over the years, but they were “more diverse, more profitable, and less capital intensive,” he said. And earnings – due to these higher quality revenues? – were about cut in half.
They all hyped TI’s share repurchases. Over the past twelve months, the company spent $2.7 billion on share repurchases. Money that was “returned to shareholders,” they claimed. That’s a lot of moolah. Awesome!
Reality is this: at an average price of $32 per share, the 12-month share repurchases would amount to about 84 million shares. But the actual number of shares outstanding dropped only by 34 million shares to 1.096 billion.
The missing 50 million shares? At the same average share price, only $1.1 billion were returned to shareholders. The remaining $1.6 billion, despite Mr. Slaymaker’s assurances, were used to buy back 50 million shares that had been newly issued for executive compensation and for acquisitions. Money that was not “returned to shareholders.” It was handed to TI executives and owners of acquired companies.
This happened year after year. Despite the many billions “returned to shareholders” via share repurchases since 2010, the actual number of shares outstanding only dropped by 103 million shares, and shareholders never saw most of the money that was supposed to have been “returned” to them. A fact that Wall-Street hype mongers consistently and very conveniently fail to mention.
So would there be more acquisitions? Mr. March responded as if walking on eggs. He didn’t want to come out and say it outright. He chose his words carefully: “Given the valuations that we presently see with many companies out there that might be an attractive addition to our portfolio, it’s difficult for us to look at what we might have to pay for some of those acquisitions and actually get a reasonable return on the investment for our shareholders.”
In other words: the market is overpriced.
And with respect to companies like TI, that suffer from sagging revenues and plunging profits, but whose shares are soaring regardless, there can only be one rational explanation: the market has sunk into a Fed-induced delirium.
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