Marketgems Earnings Trader- Trading Strong or Weak Earnings Growth

[jenna]

IBM..watch for possible downside. Be careful and check out any trading decisions thoroughly:

-However, James Grant, founder of Grant's Interest Rate Observer, believes the health of IBM's core operations is difficult to gauge, due to the company's "financial engineering."

-Grant believes the "predictable" earnings reports have less to do with core operations and more to do with carefully engineered reporting.

-Though 2000 was reported to be a "stellar year" for the company, a deep analysis reveals the performance was tainted.

-According to Grant, the problem areas include:

IBM's rising contribution of pension-plan gains to operating income

Increasing use of working capital to finance receivables

Huge sums of money spent to manage share dilution

-Robert Tracy at GrantsInvestor.com notes that, though net income is rising, cash flow from operations is falling.

-According to Tracy, by reducing its tax rate to 29.8% from 34.4%, lowering the "allowance for doubtful accounts as a percentage of total receivables," and changing certain "assumptions" on its pension returns, IBM managed to add 47 cents a share to 2000 net income.

-Further, Tracy notes that the share buy-back program is "an expensive way to manage dilution of shares from option grants."